Conventional Loans

A conventional loan is a type of mortgage that is not insured or guaranteed by the federal government. Instead, it is backed by private lenders such as banks, credit unions, or mortgage companies. Conventional loans typically follow guidelines set by two major government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac.

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are two of the largest purchasers of mortgages in the secondary mortgage market. They buy loans from lenders, thereby providing liquidity to the mortgage market, which allows lenders to originate more loans.

Conventional loans can be conforming or non-conforming. Conforming loans meet the underwriting guidelines established by Fannie Mae and Freddie Mac, including criteria such as loan amount, credit score, debt-to-income ratio, and down payment requirements. Non-conforming loans, on the other hand, do not meet these guidelines and are often referred to as jumbo loans.

By conforming to the standards set by Fannie Mae and Freddie Mac, lenders can sell their loans to these entities in the secondary market, which reduces their risk and allows them to free up capital to issue more loans. This process helps maintain liquidity in the mortgage market and ensures that lenders can continue to provide affordable mortgage financing to homebuyers.