What is a Conventional Loan?A conventional loan is basically any kind of lender agreement that's not backed in full by the Veterans Administration or protected by the FHA (the Federal Housing Administration). All told, there are several broad categories of conventional loans. Fixed rate mortgages are simpler in some cases. A home borrower “locks in” at an interest rate, and he or she pays down the principal and interest on the mortgage every month at that rate.
Other so-called conventional loans include conforming loans. Basically, these are arrangements that meet stipulations set forth by Fannie Mae and or Freddie Mac, two very large mortgage trading companies.
While Fannie Mea and Freddie Mac don't actually approve or disapprove of loans, they buy and sell mortgages. Lenders enjoy signing borrowers up with conforming loan, since they can later sell these loans to Fannie Mea or Freddie Mac to get funds for other investments.
Nonconforming loans -- instruments which don't meet Fannie Mae or Freddie Mac qualifications -- 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 that's too large to be eligible to be traded by the two main loan purchasers.
Current Fannie Mae guidelines for conventional homes put the maximum price for a conventional, conforming loan at just over $415,000 for a single-family arrangement. If you live outside of the 48 contiguous United States (in Guam, Hawaii, or Alaska), you may qualify for a larger loan limit.
What determines the rate for your conforming loan? First and foremost, the kind of loan you want will impact pricing both in the short-term and in the long-term. Lenders will also look at how much funds you have to close, your credit history, and your employment history. Finally, the financial details of your final arrangement will be intimately tied up with the location of your property and the kind of home you purchase or build.
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