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What is a Conventional Loan?

In a recent blog post, A Quick Overview of Mortgages, we went over the four most popular mortgage loans in the US. Last week, we did a deeper dive into FHA loans.


Today, let’s go a little deeper into conventional loans, which are the most popular mortgage loans in the US. Unlike FHA loans, these loans are not backed by the US government. They are available through private lenders and may be backed by a government-sponsored enterprise (GSE), the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These enterprises buy loans from lenders and sell them to investors. This process allows lenders to originate more loans, therefore making mortgages accessible to more people.


Conforming loans are a subset of conventional loans and are so-named because they conform to guidelines set by the government-sponsored enterprises. The guidelines include a maximum loan amount (around $485,000), credit score requirements (over 620), and a down payment minimum (3% or higher depending on credit score).


Like FHA loans, if the borrower puts down less than 20%, they will be responsible for paying private mortgage insurance (PMI) until they reach 20% equity in the home. The borrower can either wait until they make enough principal payments that the equity portion reaches 20% based on the original loan amount OR if the borrower feels the value of their home has increased, they can order an appraisal. Either way, the borrower will probably have to call the bank and asked for the PMI to be removed.


A type of conventional mortgage that is not a conforming one is a jumbo mortgage. You can probably tell from the name that these are mortgage loans greater than around $485,000. Their interest rates differ from conforming conventional loans. These loans are not backed by Fannie nor Freddie, so the lenders are unable to sell these loans to them and therefore generally keep them on their books. Any loan not sold by the lender and kept by them is called a portfolio loan.


If you’ve been considering buying a home and are curious about the different mortgage options available to you, hopefully this post has helped. If you can put 20% of the purchase price down and have good credit, a conventional loan will be the best option for you.



Source: https://www.lendingtree.com/glossary/conventional-loan/

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