What is a Conventional Loan?

A conventional loan is a mortgage not backed by the Veteran's Administration or protected by the Federal Housing Administration. There are many different types of conventional loan programs, such as: Adjustable Rate Mortgages, Fixed Rate Mortgages, Interest Only Mortgages, and even Negative Amortization Mortgages. Most commonly, fixed rates mortgages are the simplest. A loan officer will "lock an interest rate and may have the borrower pay down the rate to make it more affordable.

Another conventional loan is a conforming loan. Conforming loans meet guidelines set by Fannie Mae and/or Freddie Mac. These mortgage servicers are two very large mortgage trading companies. Fannie and Freddie buy and sell mortgages, unlike loan originators that actually create the initial loan. Lenders typically finance borrowers at conforming guidelines to ensure their loans can be sold in the secondary mortgage market (like Fannie and Freddie).

Besides conforming loans, there are non-conforming loans. Non-conforming loans can also be called jumbo loans. They are considered non-conforming because they do not adhere to Fannie and Freddie's guidelines and are too large in borrowed amount to be eligible to be traded.

Determining the interest rate on conventional loans is best understood by loan officers. They understand what rates borrowers can receive depending on their credit worthiness. Credit worthiness can be considered as the borrowers credit history (likeliness to repay a debt), debt-to-income ratio (income vs. expenses per month), employment history and many other factors. Depending on how each category of credit worthiness matches up to current lending guidelines, the borrower can receive a more favorable interest rate. Rate buy down's can also be purchased to lower an initial interest.

When the loan officer gathers the borrower's credit worthiness, they can then place the buyer into a program that best fits their needs. For instance, some buyers may not have a high enough credit score to receive the amount of funds they need to purchase a home. Instead of lowering the purchase price of the desired home, the loan officer may ask the borrower to put down more money. The downpayment will also have a large influence on the interest rate and loan program in which the borrower can qualify.