There are “Agency” loans that are regulated by Fannie Mae and Freddie Mac (called GSE’s, or government sponsored agencies).

There are also “Gov’y” Loans, or Government Loans guaranteed by the government, including FHA – Federal Housing Administration, VA -Department of Veterans Affairs, or USDA – Department of Agriculture loan programs).

In contrast, Conventional Loans are originated and funded by private lenders, banks, credit unions, and other financial institutions. They are not insured or guaranteed by the government. 

They can be “conforming” or “non-conforming” to the regulations of Fannie Mae or Freddie Mac, the GSEs.

Here are some key features and characteristics of conventional loans:

Lack of Government Insurance or Guarantee:

• Conventional loans do not have government insurance or guarantees, which means that the lender takes on more risk. If the borrower defaults on a conventional loan, the lender does not have a government agency to cover their losses. This often means that conventional loans have stricter credit and income requirements compared to government-backed loans.

Down Payment:

• Conventional loans typically require a down payment, and the size of the down payment can vary. Traditionally, borrowers have been required to put down at least 20% of the home’s purchase price to avoid private mortgage insurance (PMI). However, some lenders now offer conventional loans with down payments as low as 3% to 5%. When the down payment is less than 20%, PMI is usually required to protect the lender in case of default.

Credit Requirements:

• Conventional loans typically have higher credit score requirements compared to government-backed loans. Borrowers with stronger credit histories are more likely to qualify for favorable interest rates and loan terms.

Interest Rates:

• The interest rates on conventional loans can vary depending on market conditions, the lender’s policies, and the borrower’s creditworthiness. Generally, borrowers with better credit scores and larger down payments can secure lower interest rates.

Loan Limits:

• Conventional loans can be used for a wide range of property types, including single-family homes, condos, and multi-unit properties. There are also conventional conforming loan limits set by the Federal Housing Finance Agency (FHFA). Loans that exceed these limits are known as jumbo loans and often have stricter requirements.

Loan Terms:

• Conventional loans are available with various loan terms, with 30-year and 15-year fixed-rate mortgages being the most common options. Borrowers can also find adjustable-rate mortgage (ARM) options with conventional loans.

Private Mortgage Insurance (PMI):

• If the borrower’s down payment is less than 20% of the home’s purchase price, private mortgage insurance is typically required. PMI protects the lender in case of default but adds an additional cost to the borrower’s monthly mortgage payment.

Property Usage:

• Conventional loans can be used for primary residences, second homes, and investment properties.