What are Conventional Loans?

Home buying

Conventional Loans Defined: Know the Difference

Conventional loans are the most common mortgage loan type in America.  It is also the broadest loan category with varying loan terms and subgroups falling under its name.  The most popular form of a conventional loan is a 30 year fixed rate mortgage.

The one unifying characteristic for all conventional mortgage loans is that private lenders provide them with no government-backed guarantee if a borrower defaults.  This is a contrast to the mortgage insurance safety nets provided by government agencies such as the Federal Housing Administration (FHA loans) and U.S. Department of Veterans Affairs (VA Loans).  To put it simply, almost every mortgage loan that is not issued by a government agency can be considered a conventional loan.

Interest rates on conventional loans vary greatly. When it comes to qualifying applicants, conventional lenders are much stricter due to the added risk associated with a lack of protection against mortgage defaults.  This means that the best mortgage rates are reserved for those with excellent credit scores, and a substantial amount of money to put as a down payment.  The minimum credit score for conventional loans is usually 620, but the interest rates available to borrowers with that score are typically much higher, and therefore undesirable.   For most lenders the ideal down payment amount is 20%.  On the positive side, we are starting to see more and more conventional mortgage lenders beginning to accept 10%, and even 5% down.

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