Conventional Loans

What is a conventional loan?

If you are planning to borrow $647,200 or less for a single-family home, you should be looking at a conforming conventional loan. Conventional conforming loans are not made by a government entity, like FHA and VA loans, but instead follow the terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These established guidelines generally call for a minimum credit score, certain income requirements, and a minimum down payment (generally between 5% and 20%).

Conventional home mortgage loans have either fixed or adjustable rates. A fixed-rate mortgage, or FRM, means that your mortgage monthly payments remain fixed for the period of the loan and typically have a term of 15 or 30 years. A shorter-term loan usually results in a lower interest rate. An adjustable-rate mortgage, or ARM, fluctuates in relation to the rate of a standard financial index; therefore, monthly payments can go up or down accordingly.

Due to origination fees, down payments, mortgage insurance, points, and appraisal fees, borrowers completing a conventional loan may have to show up at closing with a sizable sum of out-of-pocket money, or be prepared to roll over some of these costs into their mortgage amount, which may result in a higher loan rate. If you are selling your current home, however, you will likely have money from your sale to offset these costs. Because these mortgages generally require higher down payments than the other options, the home’s equity can build more quickly.