A conventional loan is a mortgage that is not backed by any Government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA). Conventional loans meet the lending requirements of Fannie Mae and Freddie Mac, the two largest buyers of mortgage loans in the US.
Conventional Loan Benefits:
Financial Concessions: Although a conventional mortgage loan may have a higher interest rate compared to other loans, lenders can offer potential borrowers a series of concessions to help them overcome individual financial difficulties.
Flexible repayment schedule: Conventional lenders make available several repayment plans, such as 10, 15, 20, 25, and 30-year plans. The shorter the repayment time frame, the lower the interest rate will be.
Flexible Private Mortgage Insurance (PMI): If a borrower cannot afford to make a 20-percent down payment on a house, he will have to pay PMI. But conventional loans allow home buyers to choose when and how they want to pay mortgage insurance. For instance, a borrower can pay PMI upfront, as a single lump sum at closing, or make annual or monthly payments.
Automatic PMI Termination: If the borrower chooses to make a premium payment every month, the lender must terminate the mortgage insurance when the loan balance reaches 78 percent of the original value, according to the Homeowner’s Protection Act of 1998.
Lower Closing Costs: A conventional loan has fewer requirements than other types of loans, being easier to prepare. This means that the borrower must cover lower closing costs, which often include origination fees, legal fees, appraisal/home inspection fees, discount points (if applicable), title insurance, and escrow deposit.