Conventional Loan Explained

A conventional loan is a lender agreement that's not guaranteed or insured by the federal government under the Veterans Administration (VA) or the Federal Housing Administration (FHA), or the Rural Housing Service (RHS) of the U.S. Department of Agriculture. A conventional loan can, however, follow the guidelines of government sponsored enterprises (GSE's) like Fannie Mae or Freddie Mac. Both Fannie Mae and Freddie Mac are stockholder-owned corporations and are not part of the federal government.

At one point in our history, conventional loans were the only mortgage loans available and they were all made by local lenders such as banks, savings and loans, and credit unions. They kept and serviced these loans in their own portfolio until they were either paid in full or foreclosed on.

In the late 1930's, a secondary market was created which allowed these local lenders to sell their loans, getting the full payment much more quickly. Then the organizations that purchased the loans owned the agreement and collected payments from the borrower. Today it is very common for lenders to sell their loans to the secondary market.

Conventional loans may be "conforming" and "non-conforming". Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. Nonconforming loans don't meet Fannie Mae or Freddie Mac qualifications, but are also considered conventional.

Another category of loans, jumbo loans, falls outside of Fannie Mae eligibility but is also considered conventional. A jumbo loan is a loan above the maximum loan amount established by Fannie or Freddie and they usually have a higher interest rate.

The 2009 conforming loan limits remain at the limits set in 2006, 2007 and 2008. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling. If you live outside of the 48 contiguous United States (in Guam, the Virgin Islands, Hawaii, or Alaska), or the dwelling is for a two-family, three-family, or four-family configuration, you qualify for a larger loan limit.

Conventional loans can be fixed rate mortgage or adjustable rate mortgage with many multiple configurations such as balloon payments, Option ARMs, hybrid (combination of fixed and ARM) loans, and a wide range of payment periods.

Related topics: Refinance, Foreclosures