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.
Explore DefinitionProspective borrowers are required to complete an official mortgage application, provide the required documents, credit history, and current credit score. A credit score of at least 680 and, preferably well over 700 is needed to get qualified for this type of mortgage. The higher the score, the lower the interest rate on the loan, with the best terms being reserved for those over 740. Conventional mortgages are often the best or only option for home-buyers who want the residence for investment purposes, as a second home, or who want to purchase a property priced over $500,000. Conventional mortgages are the go-to mortgage for a first-time buyer.
The benefits of conventional mortgages are many since the buyer is making a larger down payment. In this case, the owner will have more equity in the property; this also means they have a lower risk of default. The speed of implementation is one of the major drawbacks for an investor if the funds are not received on time that could make or break a deal in an ever-changing real estate market. The approval process, also known as “underwriting” is a long and tedious process wherein the lender will cross-examine the credit history, income, employment status etc of the borrower.