A conventional loan is a type of mortgage loan that is not guaranteed or insured by a government agency, such as the FHA or VA. Conventional loans are originated and serviced by private lenders, and are typically offered to borrowers with strong credit scores and a stable income.
Conventional loans are available for various types of properties, including single-family homes, multi-unit properties, and condominiums. They come in two main types: conforming and non-conforming. Conforming loans meet certain criteria set by Fannie Mae and Freddie Mac, the two government-sponsored entities that purchase and securitize mortgages, while non-conforming loans do not meet these criteria.
One of the main differences between conventional loans and government-backed loans like FHA and VA loans is the down payment requirement. While FHA loans require a minimum down payment of 3.5% and VA loans don’t require a down payment, conventional loans typically require a down payment of at least 3% for a primary residence, and up to 20% for an investment property.
Conventional loans also require borrowers to pay for private mortgage insurance (PMI) if they make a down payment of less than 20%. PMI is a type of insurance that protects the lender in case of default, and the cost of the insurance is typically added to the monthly mortgage payment.
Interest rates for conventional loans can vary depending on a borrower’s credit score, loan-to-value ratio, and other factors. Conventional loans may offer fixed or adjustable interest rates, and typically have terms of 15 or 30 years.