Definition
A conventional mortgage is a fixed-rate installment loan for real property in which the property serves as collateral for the loan, the loan-to-value (LTV) ratio does not exceed 80% and it meets federal guidelines.
Analysis
A conventional mortgage meets lending guidelines established by Fannie Mae and Freddie Mac. The loans are not government insured, but Fannie Mae and Freddie Mac are major purchasers of mortgage debt.
Converntional loans meet the requirements of these government chartered mortgage purchasers. Mortgage lenders will want a large percentage of their loans to be classified as conventional, thereby enabling them to sell a percentage of the loans to Fannie Mae or Freddie Mac.
A conventional mortgage has a fixed interest rate that remains constant throughout the life of the loan. The term of the loan is usually 15, 20, 25 or 30 years.
The loan-to-value ratio cannot exceed 80%. This means that on a $100,000 purchase, the maximum conventional mortgage loan amount can be is $80,000. The remaining $20,000 can come from a cash down payment, a second mortgage or from a down payment assistance program.
One of the major perks of a conventional mortgage is that you may avoid private mortgage insurance (PMI). PMI guarantees the loan for the lender, but it does nothing for you other than to help you qualify for the loan. PMI can easily reach monthly payments of $150 or more a month, even on a starter home.
