Conventional Mortgage or Loan

About Conventional Mortgage or Loan:

A conventional mortgage is a homebuyer’s loan made through a private lender. Compared to a Federal Housing Administration (FHA) loan, a conventional loan often offers a higher interest rate. It can also require a higher credit score to qualify.1

Conventional loans are not offered or secured by a government entity. Instead, these mortgages are available through private lenders, such as banks, credit unions, and mortgage companies.

However, some conventional mortgages can be guaranteed by two government-sponsored enterprises (GSEs): the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).2

  • A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity.
  • It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.
  • Potential borrowers need to complete an official mortgage application and supply the required documents, their credit history, and current credit score.
  • Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as Federal Housing Administration (FHA) loans.

Understanding Conventional Mortgages and Loans:

Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. Conventional mortgages or loans are not guaranteed by the federal government and, as a result, typically have stricter lending requirements by banks and creditors.

There are a few government agencies that secure mortgages for banks, such as the Federal Housing Administration (FHA), which offers low down payments and no closing costs.3 Two other agencies are the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture’s (USDA’s) Rural Housing Service, neither of which requires a down payment.45 However, there are requirements that borrowers must meet to qualify for these programs.

Example of Conventional Mortgage:

If, for example, you took out a conventional mortgage to buy a home worth $500,000, had a $100,000 down payment (that’s 20%), and a good credit score of 650, you might be able to get a conventional mortgage with a locked-in rate of 3.4% (as of July 2022). This would equate to a monthly payment of around $2,500 on a 30-year loan: $1,800 in principal and interest payments, and around $700 in taxes and insurance.

Conventional Mortgage vs. FHA Mortgage:

The primary difference between conventional and FHA mortgages is that FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor credit history, or because they have limited savings.

In contrast, to qualify for a conventional loan, consumers typically must have stellar credit reports with no significant blemishes and credit scores of at least 680. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product, and current market conditions.

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