Glossary

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Conventional Mortgage

A conventional mortgage is a loan that is not guaranteed or insured by any government agency.  It is typically fixed in its terms and rate.

 

Government agencies such as the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA) can insure or guarantee loans.  The FHA is a part of the Department of Housing and Urban Development and insures residential mortgage loans made by private lenders.  The FmHA provides financing to farmers and other qualified borrowers who may have trouble getting loans.  VA loans are for veterans or members of the military and can have a lower down payment.

 

Mortgages not guaranteed or insured by these agencies are known as conventional mortgages.  These mortgages adhere to Fannie Mae guidelines. Fannie Mae, or Federal National Mortgage Association, is a corporation created by the federal government that buys and sells conventional mortgages. It sets the maximum loan amount and requirements for borrowers.

 

Usually, a conventional mortgage is a 30-year fixed rate loan.  That means it has a fixed interest rate for the 30 year term of the mortgage.  Conventional mortgages also typically require at least a 20 percent down payment.  For example, if a house costs $200,000, the lender will provide a loan for 80 percent of that amount.  So, $160,000 is financed through the lender and the borrower must pay $40,000 cash.

 

Conventional mortgages can have better interest rates than non-conventional mortgages and can be a great option for those with the 20 percent down payment.  However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage.  By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional mortgage.

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