Conventional Mortgage

Financial Dictionary -> Mortgages -> Conventional Mortgage

When buying a new home or seeking a mortgage it is very common to come across several different kinds of loans and mortgage types, which can be quite confusing. One of the most used terms is the conventional loan or conventional mortgage.

A conventional mortgage is a housing loan that is generally on a fixed interest rate term (although it can be an adjustable rate which is relatively new) and which generally meets the Fannie Mae (Federal National Mortgage Association) or Freddie Mac criteria and guidelines. They can also be called conforming loans, as they conform to conventional guidelines set out by the aforementioned institutions.

A conventional mortgage usually does not go over the appraised worth or purchase price of the property by 75%, whichever is the least of the two. It is also the norm for a conventional mortgage to be a long term loan of thirty years since buying a home is considered a lifetime investment.

The conventional mortgage gets its name because it is the most common form of financing the purchase of a house and is "conventional," i.e. not insured or guaranteed by the HUD, Veterans' Administration or the Federal Housing Agency (FHA), which would make it a governmental loan or mortgage, although it can sometimes be privately insured for added security.

Fannie Mae and Freddie Mac aren't approvers or disapprovers of loans, but are actually buyers and sellers of mortgages (aka mortgage trading companies) with their own set of stipulations. It is in the lender's best interests to use conventional mortgages because they can sell them on to the two companies to get funds for other projects at a later date.

A common opposition to the conventional mortgage is the equitable mortgage or a Federal Housing Administration loan which allows you to buy the house with a down payment of up to 3 percent. It is the only governmental loan program offered to the general public, although the Veteran's Administration is available specifically to veterans of the military.

When choosing a mortgage it is important to weigh up the pros and cons of conventional mortgage programs and the ones offered by the government. Only you know your personal circumstances and can make the right decision.