Conventional Home Loans
What is a Conventional Home Loan
By definition, a conventional mortgage or conventional loan is any type of home buyer’s loan that is not secured by a government entity, like the FHA. You can obtain a conventional mortgages through private lenders, like mortgage companies, credit unions, banks and two government enterprises—Fannie Mae and Freddie Mac. In order to obtain a conventional mortgage, you will need to complete an official mortgage application, on which you’ll need to provide your credit history, proof of income and list of assets, as well as any other required documents.
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Conventional Loans Can be Adjustable or Fixed
Conventional loans can be either fixed or an adjustable rate. Fixed-rate mortgages have a set interest rate for the entire length of the mortgage term, which can be between 10 and 30 years. An adjustable-rate mortgage (ARM) has a term of 30 years, with a low introductory rate for a fixed period, followed by periodic adjustments according to a specific benchmark, usually a specific LIBOR or a T-Bill index.
Understanding Conventional Mortgages
Typically, conventional mortgages have a fixed rate of interest, which is one that has a set interest rate for the entire length of the mortgage term, and those interest rates tend to be higher than those of government-backed mortgages. An adjustable-rate mortgage (ARM) has a term of 30 years, with a low introductory rate for a fixed period, followed by periodic adjustments according to a specific benchmark, typically a specific LIBOR or a T-Bill index.
Conventional vs. Conforming Loans
You may also be familiar with the term “Conforming mortgage,” but keep in mind that “Conventional” and “Conforming are not the same thing when it comes to financing. A conforming mortgage is one that, among other requirements, meets the funding criteria of Freddie Mac and Fannie Mae, primarily their dollar limit. In 2021, that means that the requested loan amount can’t exceed $548,250. What that means is while all conforming mortgages are conventional, not all conventional loans will qualify as conforming.
Remember, no loan will ever cover 100% of your property’s financing needs. A potential lender will be closely examining how much you can realistically afford for a monthly mortgage payment. A good rule of thumb is to stick to an amount that doesn’t exceed 28% of your gross income. Conventional loan lenders will also want to ensure that you will be able to make a down payment on a property you want to buy, and that you can cover any of the closing costs that may come up.