Conventional Loans

What Is a Conventional Mortgage Loan?

Conventional loans provide mortgage financing for well-qualified buyers.

When you apply for a home loan, you have the option to apply for a conventional loan or a government-backed loan. Government-backed loans, such as VA and FHA loans, are insured through the federal government while conventional loans are insured through private companies. The fees and additional costs associated with a conventional loan will vary depending on the mortgage lender.


Conventional mortgage loans, although not insured by the federal government, must adhere to the mortgage guidelines set by the Federal National Mortgage Association, also known as Fannie Mae; and the Federal Home Loan Mortgage Corporation, often referred to as Freddie Mac. Unlike federally insured loans, conventional loans carry no guarantees for the lender in the event the borrower defaults.


Due to the lack of government insurance, conventional loans are a higher risk for lenders. Thus, if you wish to finance your new home purchase with a conventional loan, you must often meet more stringent credit and income requirements than those who finance their properties using an FHA or VA mortgage. If the borrower makes less than a 20-percent down payment on the financed property, Fannie Mae and Freddie Mac guidelines dictate that the lender enlist a private insurer for the loan. Although you must pay the private mortgage insurance premiums each month, the Homeowners Protection Act of 1998 states that, once a borrower pays down 20 percent of the property's original value, the additional charges must cease.


Most conventional mortgages require you to repay the full loan amount at a fixed interest rate over a 30-year period.  Shorter repayment periods through 15-year mortgages are also available. You may also opt for an adjustable-rate mortgage in which the interest rate is not fixed, but rather tied to the current market rate. A borrower with an adjustable-rate mortgage can expect his interest rate to fluctuate periodically.


If you have good credit, a steady income and can afford the down payment, conventional loans often offer lower interest rates than their government-insured counterparts. Whereas FHA loans require a property to meet strict eligibility guidelines as far as price, location and habitability are concerned, conventional lenders aren't bound by the same bureaucratic regulations. Thus, lenders can often process conventional mortgages more quickly than government-insured mortgages. Also, the higher down payment requirement of conventional loans helps you build equity more quickly.


The major drawback of conventional loans is the difficulty they present for borrowers with less than perfect credit or that lack a substantial down payment. While FHA loans require only a 3.5 percent down payment, and a qualified borrower can obtain a VA loan with no down payment at all, most conventional lenders require a minimum down payment of 5 to 20 percent. In addition, the fees for originating a conventional loan are set by the lender rather than dictated by the federal government and in some rare cases may exceed the fees associated with government-backed mortgage loans.