How is a "conventional loan" defined?

A conventional loan is characterized as a mortgage that is not backed or insured by any government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, it is typically privately funded and must adhere to specific underwriting criteria set forth by Fannie Mae or Freddie Mac, which are government-sponsored enterprises that facilitate a stable mortgage market.

Conventional loans usually come in two forms: conforming and non-conforming loans. Conforming loans meet the standards for size and creditworthiness necessary to be eligible for purchase by these entities, while non-conforming loans do not meet these criteria. Additionally, conventional loans commonly require a down payment, which varies depending on the lender and the borrower's financial situation, but it is not specifically defined as a large down payment, making this definition nuanced.

Understanding that a conventional loan stands apart from government-insured loans is essential, as it affects the loan's qualifications, interest rates, and the overall borrowing process. This knowledge aligns with the specifics of conventional mortgage products available in the marketplace.