Conventional Loans

What is a Conventional Loan?

A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of government sponsored enterprises (GSE's) such as Fannie Mae or Freddie Mac as both Fannie Mae and Freddie Mac are stockholder-owned corporations and are not part of the federal government.It sets the maximum loan amount and requirements for borrowers.

Usually, a conventional loan is a 30-year fixed rate mortgage. That means it has a fixed interest rate for the 30 year term of the loan. Conventional loans also typically require at least a 20 percent down payment. For example, if a house costs $200,000, the lender will provide a loan for 80 percent of that amount. So, $160,00 is financed through the lender and the borrower must pay $40,000 cash.

Conventional loans can have better interest rates than non-conventional loans and can be a great option for those with a 20 percent down payment. However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage. By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional loan.