Tuesday Terms ~ What is a Conventional Loan/Mortgage?

A conventional loan is any mortgage which is not guaranteed or insured by the federal government.  This includes  the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.

Usually, a conventional loan is a 30-year fixed rate mortgage.  That means it has a fixed interest rate for the 30 year term of the loan.  Conventional loans also typically require at least a 20 percent down payment.  For example, if a house costs $100,000, the lender will provide a loan for 80 percent of that amount.  So, $80,00 is financed through the lender and the borrower must pay $20,000 down payment in cash.

However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage.  By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional loan or pay a monthly PMI (private mortgage insurance).  The cost tends to vary depending on the size of the down payment, the type of mortgage and the amount of coverage the lender requires. In general, it’s about 1/2 of 1 percent  of the value of the loan.