What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by a government agency. Also known as a conventional mortgage, conventional loans are usually fixed-rate loans.
Conventional mortgages make up around two-thirds of all US mortgages. These loans are packaged and sold on the secondary market as mortgage-backed securities (MBS), including as collateralized mortgage obligations (CMOs).
Conventional Loan vs FHA
Because conventional loans are not guaranteed by a government agency such as Fannie Mae or Freddie Mac, they may be more difficult and/or costly to obtain for a less-qualified borrower. FHA loans by comparison require lower down payments (as low as 3.5%).
On the other hand, borrowers with higher income, higher credit scores, better credit history, and larger down payments may find conventional loans to have more flexible terms than FHA loans. For example, FHA loan amount limits are often determined by the county where the property is located, while conventional loan amount limits aren't beholden to location.
Conventional loans can also be used to buy investment property, while FHA loans must be used for owner-occupied property only.
[Find out what your payments would be with our Conventional Loan mortgage calculator]
Conforming vs Non Conforming Conventional Loans
A conforming conventional mortgage is a loan that follows the requirements of federal agencies Fannie Mae and Freddie Mac. Conforming conventional mortgages must meet certain guideline requirements including a minimum borrower credit score, a maximum mortgage amount, and borrower’s proof of income, assets, and employment verification.
But not all conventional mortgages are conforming loans. A non-conforming mortgage is a conventional mortgage that does not conform to Fannie Mae or Freddie Mac standards. Jumbo loans and subprime loans are examples of non-conforming conventional mortgages.
[Read more about conventional loans in: 4 Savings Tips Mortgage Lenders Don't Want You to Know]
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