What Is a Conventional Loan?
A conventional mortgage is a loan that is not insured or guaranteed by the federal government. Most conventional loans are adhere to the guidelines set by Fannie Mae and Freddie Mac. If the loan meets the requirements it is considering a conforming loan, if not, then it is considered a 'non-conforming' loan. One main guideline that determines whether a mortgage is conforming or not is loan amount. Generally speaking, if a loan amount below $417,000 is considered conforming, any loan amount above $417,000 is considered a "non-conforming" loan, better known as a 'jumbo loan'.
Loan to Value (LTV) is a major criteria in qualifying for a conventional loan. If the LTV is lower that 80%, lenders require private mortgage insurance (PMI) which is an insurance policy that protects the lender from default on the loan. The purchases cannot choose the mortgage insurance company and cannot negotiate premium rates. Once your equity rises above 20% you may be eligible to cancel your PMI.
A conventional loan may have either a fixed or adjustable rate over the time span of a 20, 30, or 40 year loan life. With a fixed rate loan, the same principle and interest is paid every month until the loan is fully amortized. An adjustable rate loans can offer a 3,5, or 7/1 ARM, meaning the loan is fixed for 3,5, or 7 years, and then interest rates begin to adjust for the remaining life of the loan. Interest rates are determined by adding a margin rate to the index rate.
Loan to Value (LTV) is a major criteria in qualifying for a conventional loan. If the LTV is lower that 80%, lenders require private mortgage insurance (PMI) which is an insurance policy that protects the lender from default on the loan. The purchases cannot choose the mortgage insurance company and cannot negotiate premium rates. Once your equity rises above 20% you may be eligible to cancel your PMI.
A conventional loan may have either a fixed or adjustable rate over the time span of a 20, 30, or 40 year loan life. With a fixed rate loan, the same principle and interest is paid every month until the loan is fully amortized. An adjustable rate loans can offer a 3,5, or 7/1 ARM, meaning the loan is fixed for 3,5, or 7 years, and then interest rates begin to adjust for the remaining life of the loan. Interest rates are determined by adding a margin rate to the index rate.
