Legal Definitions - conventional mortgage

A conventional mortgage is a home loan that is not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA). Instead, these loans are offered and backed by private lenders, including banks, credit unions, and independent mortgage companies.

Borrowers typically need to meet specific credit score, income, and debt-to-income ratio requirements set by the lender and often by secondary market investors like Fannie Mae and Freddie Mac. If a borrower makes a down payment of less than 20% of the home's purchase price, they are usually required to pay for private mortgage insurance (PMI) until they build sufficient equity in the property.

Here are some examples illustrating a conventional mortgage:

• Example 1: First-Time Homebuyers with Strong Credit

  Maria and John, both with excellent credit scores and stable employment histories, decide to purchase their first home. They have saved a 15% down payment. They apply for a mortgage at their local bank, which approves them for a loan based on their financial qualifications without any government backing. This loan is a conventional mortgage. Because their down payment is less than 20%, they will also pay private mortgage insurance (PMI) until they reach 20% equity in their home.

• Example 2: Refinancing for a Lower Interest Rate

  Sarah has owned her home for several years and has built significant equity. She wants to refinance her existing loan to take advantage of lower interest rates. She approaches a private mortgage lender who offers her a new loan based on her current creditworthiness and the appraised value of her home. Since this new loan is not part of any government program, it is a conventional mortgage. Her substantial equity means she likely won't need to pay PMI.

• Example 3: Purchasing a High-Value Property

  Mr. Chen is buying a luxury condominium in a metropolitan area. The purchase price is significantly higher than the loan limits typically imposed on government-backed mortgages. He secures a loan from a large national bank that assesses his financial profile, including his substantial income and assets, to approve the financing. This loan, tailored to a higher value property and not underwritten by a government entity, is a conventional mortgage.