Types of Home Mortgages: Conventional Home Loans

Introduction and Overview

The conventional home loan can be used to describe a home loan in one of two ways. It either tells you it’s a traditional 30-year fixed rate mortgage, or it’s a private loan from a bank or trust not backed with a government guarantee or insurance. Although the conventional mortgage usually comes with a lower interest rate, it’s not meant for everyone.

A Closer Look at the Conventional Home Loan

If conventional refers to the 30-year fixed rate mortgage, a buyer should also consider other loan products in contrast before deciding. An adjustable payment mortgage of some kind may be of greater benefit, especially if the borrower has less of a down payment that she would like or the monthly payments may be too high at first. A buyer with little to invest at the outset, but who has a firm idea of future wage or other income increases, may benefit from a different kind of loan product.

If the term conventional refers to the home loan made by a private lending institution, this carries some other issues. This loan is for the better-established borrower who has at least a 20% down payment (some require 25%), a good credit rating, and a reliable income. Although most of these loans don’t exceed 75% of the appraised value or purchase price (the lower of the two), sometimes it’s allowed if the buyer carries mortgage insurance.

Advantages of the Conventional Home Loan

One advantage to the conventional loan is that the interest rate is lower than the FHA. However, this is only a small percentage, and the buyer should look at all the other factors to decide if the conventional loan is the way to go. For instance, if the borrower’s income is sporadic, as in the case of someone paid on commissions, or if her income is not expected to rise appreciably over the next few years, the conventional mortgage may not be right for her.

Down Payments and the Conventional Home Loan

Also, remember that a large down payment is required. The typical 25% down payment on a $200,000 house is a whopping $50,000! Unless a buyer is selling another house that has a lot of equity in it already, this is a daunting amount for most. This can also be an advantage, though, for those who can come up with the money—it means the lower loan amount carries with a lower monthly payment and no mortgage insurance premiums. This creates a more stable payment structure, even in the case of the conventional loans with adjustable payment structures.