What is a conventional loan?

Home loans can have a variety of characteristics, terms, and rates, and there are many different types. Most home loans, however, fall into one of two main categories: conventional or non-conventional. Non-conventional loans are often called government or federally insured loans because the government insures these loans—either partially or fully—against default.

Conventional loans are the most common home loans issued in the United States. These mortgages are not secured by the government; rather, they are issued by banks, mortgage companies, or other institutions, and commonly sold on a secondary market after closing. This means that the company that funds the loan will not necessarily be the holder of the loan for the entirety of the term.

Conventional loans are divided into two more specific classifications:

Conforming and non-conforming. Conforming conventional loans adhere to the guidelines established by the two largest investors in conventional loans, Fannie Mae and Freddie Mac. These loans require that borrowers generally have good credit, stable employment history and some funds for a down payment.

Important Benefits and Features:

  • Interest rates for conventional loans are some of the lowest available.
  • There are lots of fixed-rate options with terms including 10,15, 20 & 30 years
  • Several ARM programs are available: 3/1, 5/1, 7/1 and 10/1
  • Appraisal requirements are less strict than government loans
  • 100% gift funds can be used for down payment
  • Self-Employed borrowers can qualify with only one year of tax returns in some cases
  • Down payments as low as 3% depending on your loan amount.
  • Temporary buydowns may reduce your initial interest rate for 1-2 years.