What are Conventional Home Loans?
Conventional home loans by definition are any mortgages which are 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 conventional home loans, there are also some disadvantages. Conventional home loans generally require a larger down payment and have stricter debt to income ratio requirements. Conventional home loans do 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 loans 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 Loans facts:
Consumer Handbook Conventional Home Loans Mortgages.pdf (6.34 mb)
Conventional Home Loans Mortgages - HTML Version
Conventional home loans are 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 conventional home loans from a bank or mortgage lender or through intermediaries like a mortgage broker who will connect the borrower with a lender.
Conventional home loans are defined by the basic tenets of:
There are different ways that interest is applied to conventional home loans including:
Where a borrower's financial situation indicates a higher risk than the normal standards for conventional home loans, 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 conventional home loans 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.
Conventional home loan are 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.