CONVENTIONAL MORTGAGES

Down payment and LTV

PMI

 

A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. Market rates usually determine the interest rate on the loan.

Down payment and LTV                       

Because of the lack of insurance or guarantee by a government agency, the risk to a lender is greater for a conventional loan than for a non-conventional loan. This risk is usually reflected in higher interest rates and stricter requirements for the down payment and the borrower’s income qualification.

The loan-to-value ratio (LTV) is often lower on conventional loans than on those with government backing, which means the down payment is higher. At the same time, conventional loans allow greater flexibility in fees, rates, and terms than do insured and guaranteed loans.

PMI                               

Because of the riskiness of conventional loans that have a down payment of less than 20% of the property value, lenders often requirethe borrower to obtain private mortgage insurance, or PMI. Mortgage insurance protects the lender against loss of a portion of the loan in case of borrower default. PMI can be paid as a lump sum annually or on a monthly basis.  When the borrower has achieved 20 percent equity in the property (the loan balance falls to 80% of the home’s original value), the lender or servicer must terminate the PMI requirement on the borrower’s written request.