Definition
A conventional mortgage is a type of residential mortgage loan that is not backed by any government agency. This class of mortgage is considered a traditional form of home financing and is typically offered by private lenders such as banks, credit unions, and mortgage companies. The defining feature of conventional mortgages is that they do not carry insurance or guarantees from federal government entities such as the Federal Housing Administration (FHA) or the Veterans Administration (VA).
Characteristics
- Fixed-Term: Conventional mortgages often have fixed terms, such as 15, 20, or 30 years, during which the borrower makes regular monthly payments.
- Fixed Rate: The interest rate on a conventional mortgage is typically fixed for the life of the loan, providing predictability in payments.
Examples
Fixed-Rate Mortgage
A 30-year fixed-rate mortgage provided by a private financial institution wherein the borrower agrees to pay a consistent interest rate over the 30-year term.
20-Year Conventional Mortgage
A borrower opts for a 20-year conventional mortgage to pay off the loan faster and potentially secure a lower interest rate compared to a longer-term loan.
Frequently Asked Questions (FAQs)
1. What credit score is needed to qualify for a conventional mortgage?
Conventional mortgages generally require a higher credit score compared to government-backed loans. A minimum credit score of around 620 is typically needed, but borrowers with higher scores can secure more favorable terms.
2. How much down payment is required for a conventional mortgage?
The down payment for conventional mortgages can vary but often ranges from 3% to 20% of the home’s purchase price. A higher down payment can help avoid private mortgage insurance (PMI).
3. Can a conventional mortgage have a variable interest rate?
While conventional mortgages are often associated with fixed rates, they can also have adjustable interest rates (ARMs). The terms of these ARMs can vary by lender.
4. What is Private Mortgage Insurance (PMI)?
PMI is a type of insurance required for conventional mortgage borrowers who make a down payment of less than 20%. It protects the lender in case the borrower defaults.
5. Are conventional mortgages more expensive than FHA loans?
Conventional mortgages might require a higher down payment and credit score but often have lower mortgage insurance costs compared to FHA loans.
Related Terms
- Fixed-Rate Mortgage: A mortgage with a constant interest rate and monthly payments that never change.
- Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change periodically based on an index.
- Private Mortgage Insurance (PMI): Insurance that lenders require from homebuyers who pay less than 20% of the purchase price as a down payment.
- Federal Housing Administration (FHA) Loan: A government-backed loan that helps individuals with lower credit scores or down payments obtain mortgages.
- Veterans Administration (VA) Loan: A mortgage loan provided to veterans with favorable terms, guaranteed by the U.S. Department of Veterans Affairs.
Online References
- Consumer Financial Protection Bureau (CFPB)
- Federal Housing Administration
- Veterans Benefits Administration
Suggested Books for Further Studies
- “Home Ownership: Everything You Must Know” by Peter Vekselman
- “The Mortgage Encyclopedia” by Jack Guttentag
- “Mortgages For Dummies” by Eric Tyson and Ray Brown
Fundamentals of Conventional Mortgage: Finance Basics Quiz
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