What Is a Conventional Mortgage Loan?

conventional loan

Mortgage Q&A: “What is a conventional mortgage loan?”

A “conventional mortgage” simply refers to any mortgage loan that is not insured or guaranteed by the federal government.

The word conventional means standard, regular, or normal, which is basically saying that conventional loans are typical and common.

And that makes a lot of sense because conventional home loans make up the largest share of mortgages issued in the United States.

Their counterpart, government mortgages, account for the rest, albeit a smaller slice of the pie.

If I had to guess, I’d say that conventional loans account for about 80% of the residential mortgage market, with government loans the remaining 20%.

Types of Conventional Mortgages

  • Conventional just means non-government
  • So it can include all types of different home loans
  • Including fixed-rate and adjustable-rate options
  • Along with purchase loans and refinance loans

As you might suspect, conventional mortgage loans can be both fixed mortgages or adjustable-rate mortgages, including the 30-year fixed, 15-year fixed,  hybrid ARMs, interest-only loans, and so on. Basically anything under the sun. They can be used to purchase a home or refinance a mortgage.

Additionally, these types of loans may be conforming or non-conforming, with the former meeting the standards set forth by government-sponsored enterprises Fannie Mae and Freddie Mac.

Be careful not to confuse conventional with conforming, as the two terms are very different. However, neither are considered government loans, despite the fact that Fannie and Freddie are under government control.

Let’s talk about the difference between conventional and conforming for a moment to really let it sink in.

I’ll start by saying all conforming mortgages are conventional, but not all conventional home loans are conforming. Confused yet? Bear with me here.

To answer the first part of that statement, consider that conforming loans are those backed by Fannie Mae and Freddie Mac, which aren’t the government, as noted above.

As for the second statement, there are non-government mortgages that exceed the loan limits allowed by conforming mortgages, making them conventional loans that are non-conforming.

Jumbo Loans Are Conventional, Not Conforming

  • Jumbo loans are typically conventional loans
  • Because they don’t meet conforming guidelines
  • Or government underwriting guidelines
  • Due to their large size

Home loans over the conforming loan limit are considered jumbo mortgages and aren’t eligible for delivery to Fannie or Freddie as a result. There are no conventional loan limits (maximum loan amounts) because they aren’t governed by any particular entity.

So any private sector (non-government) mortgage lender can lend as much as they want to a borrower. And there is no set loan eligibility standard they must abide by.

But if the loans don’t meet the guidelines of Fannie and Freddie, they will often come with a higher mortgage rate as a result. This has to do with liquidity. It’s easy to sell loans that adhere to Fannie/Freddie because investors know what to expect from the underlying mortgage securities.

Conventional loans can be all over the map in terms of loan amount, down payment, credit score, and general risk. Still, both types of loans are considered conventional because they aren’t government loans.

Additionally, conforming loans have a minimum credit score requirement of 620 and tend to have a max loan-to-value ratio (LTV) of 97%, whereas non-conforming conventional loans may allow lower credit scores and even higher LTVs.

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Fannie Mae’s Homepath is a popular conforming loan program that allows LTVs of up to 97%.

These days, conventional mortgages (whether conforming or not) typically have larger down payment and higher credit score requirements than government loans, and if the LTV exceeds 80 percent on a conventional loan, private mortgage insurance is usually required by the mortgage lender.

However, conventional mortgages may provide more flexibility because banks can set their own mortgage underwriting guidelines and risk appetite, instead of being at the mercy of rigid government or quasi-government guidelines. Ultimately, loan requirements will vary by bank and lender.

For example, if a conventional lender wants to approve mortgages with 500 credit scores, or with zero down, they can, assuming they’re willing to take such risks, because they are private entities that answer to nobody.

Government Loans Are Not Conventional Loans

  • FHA mortgages
  • VA mortgages
  • USDA loans

Now let’s turn our attention to mortgage loans that are backed by the federal government, referred to as “government loans,” or “govie loans” for short. These are considered non-conventional because they’re government-backed. End of story.

So if your mortgage is insured by the government, it’s non-conventional.

The most popular of the government loans is the FHA loan, which is a mortgage backed by the Federal Housing Administration (FHA), an arm of the Department of Housing and Urban Development’s (HUD) Office of Housing.

FHA loans allow for down payments as low as 3.5 percent, but mortgage insurance is required, even if the LTV is below 80%.  Additionally, there are FHA loan limits that dictate how much a homeowner can borrow based on the county in which they reside (or plan to reside).

By the way, the MI you pay on an FHA loan differs from the private mortgage insurance (PMI) that is paid on conventional loans. That latter comes from a private sector company and has different rules in terms of removal, as well as costs.

The FHA surged in popularity after the mortgage crisis all but wiped out subprime lending thanks to its low down payment and lenient aka low credit score requirements.

In fact, many suggest that FHA lending essentially replaced subprime lending, though during the housing boom, it was quite the opposite. Nobody was interested in government loans because private, conventional lenders had the most attractive (aka risky and liberal) loan programs available.

Another common and widely used government home loan is the VA loan, which is backed by the Department of Veteran Affairs. As the name implies, it is reserved for military and their families, unlike the FHA, which any individual can use.

Lastly, there is the USDA home loan program, which provides 100 percent financing (no minimum down payments) on purchase mortgages to borrowers in rural neighborhoods throughout the country.  In that sense, it has a limited reach as well, making FHA loans the king of the govie loans.

For the record, most mortgage lenders and mortgage brokers originate both conventional mortgage loans and government loans, though the government-share has increased markedly since the mortgage crisis got underway. That’s because lenders like having an explicit government guarantee (in the way of insurance) if things go south again.

However, as time goes by and things normalize, expect conventional mortgages to regain market share.  This is especially true now that the FHA is increasing mortgage insurance premiums to shore up capital and avoid another government bailout.

If you’re shopping for a mortgage, be sure you know the distinction between these loan types. One may be better suited for you for one reason or another, and it’s always good to know all your loan options.

Assuming you live in a more expensive region of the country (or are simply buying an expensive home for your area), you may no choice but to go the conventional route due to home value alone.

Read more: FHA vs. conventional loan


11 Comments

  1. Colin Robertson June 19, 2017 at 9:34 pm -

    Susan,

    Generally, conventional loans are not assumable. Might be able to remove him from the deed and the loan during the refi if that’s what all parties want.

  2. Susan Lopez June 13, 2017 at 8:25 pm -

    Can conventional loans be assumed ?? My husbands ex is 13 years of paying on her own. She is ruining our credit. She was court ordered to refinance it but it’s a conventional loan that just got bought by Fay Financial. They told us it cant be assumed and thats what she said she was able to do. But they told us they don’t do loan assumptions. She wants him to sign off on the property deed. He wants his name off finance title 1’st.

  3. Colin Robertson April 18, 2017 at 6:27 pm -

    TB,

    May want to reach out to Select Portfolio Servicing, Inc. (if that’s what SPS stands for) to determine what happened and if Freddie Mac still backs the loan.

  4. TB April 18, 2017 at 12:40 pm -

    I have a client who is in a FED GOVERNMENT PLAN CONVENTIONAL REAL ESTATE MORTGAGE as of 2010. Bought the home in 2003. This is a 568 term. and matures in Jan 1 2050.

    In Jan 2017 the loan was backed by freddie. That same month loan was sold to SPS and now reads as mentioned above, no longer backed by Freddie Mac. I am confused as to why the loan was simply transfered and not being reported as backed by Freddie any longer. Client needs streamline to help with income issues as her husband has just passed.

    What advice do you have for this situation?

  5. Colin Robertson February 23, 2017 at 10:11 am -

    Susan,

    May want to see if it’s backed by Fannie/Freddie to see about getting a HARP refinance. If not, you could inquire with BOA directly about their own proprietary (in-house) loan mod options, while perhaps also mentioning your situation and the fact that your husband is a vet. Good luck.

  6. Susan Boss February 22, 2017 at 8:27 am -

    My loan is conventional thru BOA and the mortgage is higher then the value of home, Connecticut. My husband has dementia and no longer working, what is my best way to go about lowing the payment? He is a veteran also.

  7. JB January 22, 2016 at 9:11 am -

    +RayClifford, Collin is correct. I have a mortgage with BB&T and I simply login to their website and the amortization calculator is right there. It does include extra payment options to let you play with the numbers and it adjusts the amortization table for you as well.

  8. Colin Robertson December 11, 2015 at 1:55 pm -

    James,

    If owned by Fannie/Freddie there is HARP, which allows you to refinance if underwater with any lender that offers the product. If not owned by those two, your loan servicer may have a proprietary modification program to lower your rate. You’ll have to inquire with them directly if it’s the latter.

  9. james baker December 11, 2015 at 11:40 am -

    I m in a conventional loan and my mortgage is upside down the loan is more than the value of my home, is there any programs that can get me out of this situation. thanks for your response

  10. Colin Robertson November 19, 2015 at 9:51 am -

    Raymond,

    You should be able to login to their website and track payments and see your payment schedule. But you might need to use a calculator from a third-party site to see the effect of those extra payments as they might not display such information themselves.

  11. Raymond Clifford November 15, 2015 at 6:47 am -

    I have a conventional loan with BBT, can you tell me why they do not have an amortization schedule. When I closed my loan it was in the middle of the month which resulted in my first payment being about 46 days out and added a month to my 15 year refinance. How can I tell how much time (money, months) I have reduced my mortgage as I pay a little extra every month.
    Raymond Clifford

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