What is a Conventional Mortgage Loan
A conventional loan is a mortgage loan that is not insured or guaranteed by the government. Instead, these loans are originated and serviced by private lenders like banks, credit unions, and mortgage companies. They are considered “conventional” because they adhere to standards set by two semi-government entities, Fannie Mae and Freddie Mac.
These loans are often more flexible than government-backed options, offering a variety of terms and conditions. They can be used for various types of properties, including primary residences, second homes, and investment properties.
Conventional loans are typically available in either fixed-rate or adjustable-rate mortgages. Fixed-rate loans maintain the same interest rate over the life of the loan, making monthly payments predictable, while adjustable-rate mortgages have interest rates that can fluctuate over time.
One key feature of conventional loans is the loan limit set by Fannie Mae and Freddie Mac. These limits vary by area and are updated annually.
Also, it’s worth noting that while conventional loans do not have explicit government backing, they often require borrowers to purchase private mortgage insurance (PMI) if their down payment is less than 20% of the property’s value. This insurance protects the lender in case the borrower defaults on the loan.
Types of Conventional Loans
Conventional loans come in two varieties: conforming and non-conforming.
Conforming conventional loans abide by the guidelines and loan limits set by Fannie Mae and Freddie Mac. For 2023, the maximum limit for most areas is $726,200 for a single-family home.
Non-conforming conventional loans, also known as jumbo loans, exceed the loan limits set by Fannie Mae and Freddie Mac. These loans are often used to purchase high-value properties and are called jumbo loans.
Benefits of Conventional Loans
Conventional loans offer flexibility with varying terms, ranging from 10 to 30 years, and both fixed and adjustable-rate options. This allows you to choose a mortgage plan that aligns with your financial goals.
Lower Mortgage Insurance
If you’re able to make a down payment of 20% or more, you can avoid paying for private mortgage insurance (PMI). Even if you can’t make a 20% down payment, PMI typically gets eliminated sooner on a conventional loan than on an FHA loan.
Diverse Property Choices
Conventional loans can be used to buy a variety of property types, including primary residences, second homes, and investment properties.
Competitive Interest Rates
With a strong credit score, you can secure a conventional loan with a highly competitive interest rate, which can save you money over the life of your loan.
Is a Conventional Loan Right for You
A conventional loan could be a great choice if you:
- Have a strong credit history.
- Have good employment history and income
- Can afford a down payment of at least 3%.
- Plan to buy a home that falls within the conforming loan limits.
Remember, every person’s financial situation is unique. It’s important to review all your options and speak with a mortgage professional to determine the best fit for your needs.