What Does a Conventional Mortgage Loan Mean?

by Maggie McCormick, Demand Media

    When you're just starting the mortgage application process, you may be confused about all of the options you have. A conventional mortgage loan is the right choice for many people, but you need to decide whether it's right for you. You may be able to get your loan more quickly if you take advantage of other types of mortgage programs.

    Definition

    A conventional mortgage is offered by a bank and is not insured by the federal government. This makes it a slightly higher risk for the bank, so the qualifications are more strict. For example, it may require a higher down payment or a lower debt to income ratio. Like other types of mortgage, the interest rate that you pay is based on the prime mortgage rate and your credit score. A conventional mortgage could have a fixed rate or a variable interest rate.

    Down Payment

    The biggest difference between a conventional mortgage and other mortgage programs is the required down payment. Government-backed mortgages have low down payment requirements to help home buyers move into a home. For example, you could get an FHA mortgage with just 3.5 percent down and a VA mortgage with no down payment. Banks have different requirements for the down payment on a conventional mortgage, ranging from 5 to 20 percent.

    Conforming vs. Non-Conforming

    Conventional loans can be either conforming or non-conforming. If it's conforming, it will be for an amount under a specified maximum. In most areas, this is $417,000 for a single family home, but the amount is higher in certain areas, like Hawaii or metropolitan areas, and when you are purchasing a multi-family home. Non-conforming mortgages are for higher amounts -- usually called a jumbo loan.

    Advantage of Conventional Mortgage

    When you make a down payment of less than 20 percent of the value of the home, lenders will require you to purchase private mortgage insurance if you have a conventional mortgage. If you have another type of mortgage, you have to pay a mortgage insurance premium. These are similar fees, but in the conventional mortgage, you do not have to pay this once you reach 20 percent equity in your home.

    About the Author

    Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.