When a lender mentions a conventional loan, they are generally referring to a conforming mortgage that is eligible for purchase by Fannie Mae (FNMA) or Freddie Mac (FHLMC).
Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs), which were originally introduced by the federal government and later privatized. These two agencies are now stockholder-owned, publicly-traded corporations. Their sole purpose is to provide liquidity to the mortgage market by purchasing closed mortgages, which frees up funds so lenders can make more home loans. Fannie and Freddie are the largest source of loan funds in the United States.
The GSEs only buy loans such as fixed-rate and ARM mortgages that “conform” to their established loan guidelines. In general, the credit, income, down payment and loan amounts of these conforming loans comply with certain pre-determined standards.
As you can see, “conventional” loan is a term most lenders use when referring to loan types eligible for purchase by Fannie or Freddie. Technically, however, a conventional loan is any mortgage that is not a government-guaranteed or insured FHA, VA or USDA loan. The examples below are convention, non-conforming loan types.
Government loans are loans that are guaranteed or insured by the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), or the Veteran’s Administration (VA). Each institution sets the loan terms and conditions for their respective mortgage program.
Q: What is the difference between FHA and conventional loans?
Technically, a conventional loan is any mortgage that is not a government-guaranteed or insured FHA, VA or USDA loan. However, when a lender mentions a conventional loan they are generally referring to a conforming mortgage that is eligible for purchase by Fannie Mae and Freddie Mac.
Q: What is the difference between a conforming and non-conforming loan?
The terms and conditions of a conforming loan meet Freddie Mac and Fannie Mae standards and are eligible for purchase by the GSEs. Non-conforming loans are conventional (not government-insured) loans that do not meet GSE guidelines. Examples are Jumbo, sub-prime, construction and portfolio loans.
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