How a Conventional Mortgage Works

Conventional loans are mortgages that are not covered by any government program of insurance or guarantee. Such loans are eligible for purchase by the major secondary market agencies Fannie Mae and Freddie Mac. They offer standardized underwriting guidelines for conforming loan amounts.  

These loans can carry fixed or adjustable (ARM) rates and a variety of repayment terms that can be tailored to your individual needs. Down payment requirements may be as little as 3-5% although loans with less than 20% down require mortgage insurance.  Generally, these loans do not have prepayment penalties.  The borrower can lower Rates by paying additional points to buy down the rate. 

The mortgage can be based on either an adjustable rate interest or a fixed interest rate.  Adjustable rate mortgages are available with interest rate adjustment periods ranging from 1 to 10 yrs.  Fixed rate mortgages are usually based on either 15 yr or 30 yr. mortgage term periods.  

Conventional mortgages usually have tighter underwriting guidelines. Borrowers that have higher credit scores qualify for interest rates that are more favorable.  The total amount of the mortgage also affects the available interest rate. Every borrower’s situation is different. 

 It is important to understand that there is no cookie cutter conventional mortgage program.  The interest rates, loan terms, and underwriting standards are variable based on each individual borrower. 

 In most of the U.S., the 2022 maximum conforming loan limit for one-unit properties is $647,200.