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By: Mutual of Omaha Mortgage

What is a conventional loan?

For potential homebuyers, deciding on what type of mortgage loan is right for your financial needs and goals is a crucial step in the home buying process. One of the most common loan types among mortgage borrowers is conventional loans. To make an informed purchasing decision, it is helpful to understand what a conventional mortgage loan is and the different benefits various conventional loans types can offer.

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and the homeowners insurance is usually paid by the borrowers.

Conventional loans are categorized to conforming and non-conforming loans. Most loans are conforming, which means they meet the requirements and guidelines established by Fannie Mae and Freddie Mac. Fannie Mae and Freddy Mac are government sponsored agencies (GSEs) that buy mortgages from lenders to sell to investors.

Non-Conforming Loans are loans that that do not conform to GSE guidelines. These include, jumbo Loans, portfolio loans, and non-qualified mortgage (Non QM) loans.

What is the difference between conventional fixed-rate and adjustable rate mortgage loans?

Understanding the different types of conventional loan options will help prospective homebuyers select the correct loan for their purchasing needs. The two categories of conventional loans are:

  • Fixed Rate Mortgage (FRM) Loans: A loan with an interest rate that locked during the application process. A fixed-rate mortgage loan does not change over the life span of the loan.
  • Adjustable Rate Mortgage (ARM) Loans:  A loan that has a variable interest rate which can rise or fall. Typically, adjustable rate mortgages have a lower interest rate compared to FRMs however this changes after approximately five to seven years into the life of the loan.

Can a fixed rate mortgage go up?

A fixed rate mortgage loan, inclusive of the interest and principal payment, is locked in for the life of the loan. The interest rate of a fixed rate mortgage payment will not change, however, a homeowner’s total mortgage payment may increase slightly over time due to fluctuations in homebuyer’s insurance premium or changes to the home’s property tax.

What are the advantages of a fixed-rate conventional mortgage?

The main advantage of a fixed-rate mortgage is that the borrower is protected from sudden or significant increases in their monthly mortgage payments. Many homebuyers feel comfortable with a fixed-rate conventional mortgage loan because they can easily understand their payment requirements based on the duration of the loan. Fixed-rate loan program parameters and eligibility requirements can vary slightly from lender to lender.

How much is a conventional loan down payment?

A typical conventional loan down payment is 20%, but it is possible to get a conventional loan with less than 20% down. There are some conventional loan programs that allow borrowers who meet specific requirements to qualify with as little as 3% down. 

Is a jumbo loan a conventional loan?

A jumbo loan is non-conforming conventional loan. This loan is considered non-conforming because it is not backed by a government agency. A jumbo loan is often used to help prospective buyers finance high value properties which may exceed the qualifications for a conventional conforming loan. To qualify for a jumbo conventional loan, the Federal Housing Administration (FHA) requires the property have a value of more than $ $484,350. Jumbo loans are only available in certain U.S. counties. These loans typically require higher down payments and minimum credit score of 720 to qualify.

How long is a typical mortgage term?

Choosing the term length of a conventional mortgage loan is a crucial part of the home buying process. The most popular term for a conventional mortgage loan is 30 years. The 30-year-fixed rate mortgage has been a mainstay among U.S. homebuyers for many years. The 30-year FRM typically offers a lower monthly payment as a result of spanning payments over a longer duration but often has a higher interest rate compared to adjustable-rate mortgages (ARMs).

In addition to the 30-year term, 15-year mortgages are also available for a variety of mortgage products. A 15-year mortgage is paid off in half the amount of time as a 30-year mortgage, but the monthly payment is often higher. For home buyers looking to eliminate mortgage debt more quickly, a 15-year fixed rate loan could help them achieve those financial goals. When potential home buyers are looking to secure a conventional mortgage loan, it is important to have all the facts. Understanding the types of conventional loans available will help the purchaser find the one that fits their needs and financial goals.

Interested in learning more about your conventional loan options? Click here to visit Mutual of Omaha Mortgage's full list of purchase loan offerings and get started today!