Conventional loans are mortgage loans offered by non-government sponsored lenders. A conventional, or conforming, mortgage adheres to the guidelines set by Fannie Mae and Freddie Mac. It may have either a fixed or adjustable rate.
While many think that a 20% down payment is required for all conventional loans, many lenders now offer low down payment options as low as 5% and first time home buyer programs with buyer contributions down to 3%.
If a buyer’s down payment is less than 20% there is private mortgage insurance required (PMI) on the loan. The PMI is there to protect the lender in case the borrower forecloses on the property. However, once the borrower has paid down the principle balance to 80% of the homes original appraised value, they can ask the lender to eliminate the PMI. If the balance drops to 78% by a combination of paying down the balance and the value going up, the servicer is required drop the PMI.