Some types of mortgages are backed or guaranteed by a government agency such as Veteran Affairs (VA) loans. Mortgages that are not insured by an agency are conventional loans. Conventional loans exist for homebuyers or homeowners who may not be able to obtain approval under non-conventional mortgage guidelines.
While conventional loans are not insured by any government agency, these loans do adhere to specific guidelines. The guidelines that conventional mortgage lenders follow are set by Fannie Mae or more formally known as the Federal National Mortgage Association (FNMA). Fannie Mae was created by the federal government and is one of the biggest buyers and sellers of conventional loans. Fannie Mae sets all of the requirements that conventional mortgage borrowers must meet, including minimum credit scores, debt-to-income ratios and maximum loan amounts.
Conventional mortgages tend to be 30-year-fixed rate mortgage loans. A 30-year-fixed rate conventional mortgage is a fully amortized mortgage. this means the mortgage payments are calculated so that the borrower pays equal principal and interest payments per month, and at the end of the 30-year term, the mortgage is paid in full. It also means that the interest rate is fixed for the entire term of the loan.
While unconventional loans may allow borrowers to finance up to 100 percent of the value of the home, conventional loans tend to require some form of a down payment. Conventional loan lenders usually require a 20 percent down payment, so if the purchase price of the home is $100,000, then a conventional loan would require that the borrower produce a $20,000 down payment. The conventional loan would then finance the remaining 80 percent or $80,000 of the purchase price.
Conventional loans are seen as less risky than unconventional mortgages. This is primarily due to the fact that the borrower has a vested interest in the property that is higher than unconventional loans because conventional loans require a higher down payment. In return, conventional mortgages tend to have lower interest rates than unconventional mortgages.