What is a Conventional Home Loan?

Most people who buy a home finance at least part of the price with a mortgage. There are several kinds of mortgage programs to choose from, and one of the most common is what's called a conventional mortgage. 

The term "conventional mortgage" generally describes a mortgage that isn't part of some government program. Conventional home loans typically require at least a 5 percent down payment and have requirements regarding buyer income levels and credit scores that are usually higher than for other types of loans. 

A common misconception is that conventional home loans must be fixed-rate loans. Although many conventional loans are fixed-rate loans, with terms of either 15 or 30 years, they can also have an adjustable rate. If they conform to limits set by Freddie Mac and Fannie Mae, they are called conforming loans. If not, they are called non-conforming or "jumbo" loans. 

Conventional home loans usually require more up-front money at closing in the form of fees and mortgage insurance if you don't have a 20 percent down payment than do government-backed loans.

Conventional loans also have other disadvantages compared with government-backed loans. For example, FHA mortgages are assumable, meaning a buyer can take over the original mortgage on a home. Conventional mortgages usually are not.

On the other hand, conventional loans do not have special qualification requirements. For example, to get a VA loan, you must be a veteran of the U.S. military. 

Conventional loans also can be easier to get for some people. FHA loans, for example, often have more strict inspection and appraisal rules. Because of this, not all banks originate FHA loans. Mortgage insurance premiums also are often higher on FHA loans, and the insurance doesn't automatically cancel when you reach 20 percent equity.

As you can see, conventional loans have both pros and cons compared with other loan programs.