Q:

What is a conventional loan?

A:

Quick Answer

A conventional loan is a home mortgage issued by a traditional lender without support from a government-backed loan program. Typically, with a conventional loan, the borrower pays 20 percent down on the purchase price of the house. However, borrowers can get traditional non-government bank loans with a smaller down payment.

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Full Answer

When a home buyer is not able to make a 20 percent down payment on a conventional loan, the bank requires the home buyer to pay for private mortgage insurance. PMI is coverage the borrower purchases that pays the lender back if the borrower is unable to make mortgage payments. Lenders require this extra protection because is it riskier for them to fund a purchase when the borrower doesn't make a sizable down payment.

On a fixed-rate conventional loan, a home buyer makes fixed monthly payments of principal and interest for a stated period of time. On a variable-rate conventional loan, the borrower's payments can fluctuate based on changes in prime interest rates.

Government-backed programs such as the FHA loan program are alternatives for home buyers who can't make a sizable down payment or meet the minimum credit requirements of conventional lenders. FHA loans require just a 3.5 percent down payment.

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