Conventional Loan
Definition
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
Example
A buyer with a 740 credit score and 10% down payment obtains a conventional loan for $300,000. Because the down payment is less than 20%, the lender requires PMI. Once the buyer reaches 20% equity, the PMI can be removed.
Exam Tip
Know the key differences between conventional and government-backed loans: conventional = no government guarantee, requires PMI below 20% down. FHA = government insured, lower credit requirements. VA = government guaranteed, no down payment. PMI can be removed from conventional loans at 20% equity but MIP on FHA loans cannot easily be removed.
Related Financing Terms
Deed (in foreclosure context)
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
Trustee Sale
A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.
Foreclosure
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Conventional Loan and other financing concepts.