Personal Finance: Conventional Loans Explained

 

A conventional loan is a specific type of mortgage loan that is not government-backed. There are two main types of conventional loan: conforming and non-conforming.

Conforming conventional loans can be further broken down into two subcategories. These are referred to as Fannie Mae or Freddie Mac, depending on whether they conform to rules set down by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation respectively. A definition of a mortgage can be found in the PDF attachment to this post.

Brandon Glickstein is co-founder and Integrator at a marketing company that specializes in lead generation for the mortgage industry.

Finance: What Is a Mortgage?

 

How to Get a Conventional Mortgage Loan

Conventional mortgage loans are provided by private mortgage lenders, which includes entities such as banks, credit unions and other financial institutions.

Many of these organizations may also offer government-backed mortgages, which often attract additional perks such as no down payment, lower credit score requirements and no requirement to take out mortgage insurance. You can learn more about credit scores by watching the embedded short video. 

Most lenders will look for a credit score of at least 660 before accepting a mortgage application, although some people may qualify at 620 depending on their overall credit history.

Down payment requirements can be as low as 3% with some lenders, although most will insist on private mortgage insurance for anyone with a down payment of less than 20%. This can add between 0.3% and 1.5% to loan repayment amounts on an annual basis.

Private Mortgage Insurance

Private mortgage insurance may be a condition of taking out a conventional loan if the buyer has a deposit of less than 20% of the property value.

This type of insurance is built into the monthly mortgage repayments and designed to provide additional financial protection to the lender if the borrower defaults on the loan. It does not protect the borrower, who may still be at risk of foreclosure if repayments are not made.

Private mortgage insurance does not have to be permanent – borrowers can stop paying this part of the premium once their mortgage balance drops to 80% of the value of the property.

There are many different types of UK mortgages. The infographic attachment lists some of the most common.