Conventional Mortgage

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Definition

A conventional mortgage is a type of mortgage wherein the loan for no more than 80% of the purchase price of the property; the remaining amount required for a purchase, that is 20%, comes from ones resources and is referred to as the down payment. It is any type of loan which is not secured or offered by a government body such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service, instead it is available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).  Conventional mortgages have the lowest loan-to-value ratio, meaning, the amount of loan is low relative to the value of the property. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans and the term of a conventional mortgage is usually 15, 20 or 30 years.

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LAYMEN TERMS

An individual plans to buy an object for $100 but he can only pay $20. He borrows $80 as loan from a friend. This loan is called a conventional mortgage.

HOW DOES THIS TERM APPLY TO YOU

Suppose you’re a first time home-buyer and you're making $100,000 purchase price for a property. If you are making a $20,000 down payment (or higher) then that means you’re opting for a conventional mortgage.

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