What is a Conventional Home Loan?
A conventional home loan by definition is any mortgage which is not guaranteed or insured by the federal government. This type of loan was the first traditional mortgage loan made by local banks. The loans were held by the bank in a portfolio until paid in full. There are a number of advantages to a conventional home loan, there are also some disadvantages. A conventional home loan generally requires a larger down payment and have stricter debt to income ratio requirements. A conventional home loan does not have an up front mortgage insurance premium due, but may have monthly private mortgage insurance if certain loan to value ratios are exceeded.
Fannie Mae and Freddie Mac purchase mortgages that conform to conventional home loan limits, down payment requirements, debt to income ratios and other established underwriting guidelines. Both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government sponsored enterprises created by congress to purchase conforming mortgage loans and resell them on the secondary market.
Conventional Home Loan facts:
Consumer Handbook Conventional Home Loans Mortgages.pdf (6.34 mb)
Conventional Home Loan Mortgages - HTML Version
A conventional home loan is a loan where real property like a fixed building or home is provided as collateral or security whose equity is reserved to be delivered to the lender in case the borrower defaults on repayment of the debt. This is generally formalized in a mortgage note which documents the encumbrance of the fixed asset in exchange for the funds required to purchase the property. A home buyer can get a conventional home loan from a bank or mortgage lender or through intermediaries like a mortgage broker who will connect the borrower with a lender.
A conventional home loan is defined by the basic tenets of:
There are different ways that interest is applied to a conventional home loan including:
Where a borrower's financial situation indicates a higher risk than the normal standards for a conventional home loan, the lender may increase the interest rate by one or more "points" which increases the overall profitability of the loan and offsets the higher risk that the lender is assuming by lending to the borrower.
There is another type of amortization used in a conventional home loan where the number of payments are computed for a certain period of time (3 -5 years for example) but at the conclusion the balance of the outstanding principal is due for payment. This is referred to as a balloon payment or a bullet payment.
A conventional home loan is the most basic form of lending with commonly accepted levels of risk and values that are considered reasonable safe to the lender or "conventional" in their risk level.