Conventional Loans

Updated 2026-05-17

Conventional loans are mortgage loans that are not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) (FHA), the Department of Veterans Affairs (VA) (VA), or the US Department of Agriculture (USDA) (USDA). They are the most common type of mortgage and are typically offered by private lenders like banks, credit unions, and mortgage companies.

Conventional loans are a significant part of the Consumer Credit and Loan Structures and are covered in the NMLS SAFE MLO National Test.

Types of Conventional Loans

Conventional loans are often categorized as either "conforming" or "non-conforming":

• Conforming Loans: These loans meet the underwriting guidelines and loan limits set by Government Sponsored Enterprise (GSE) and Government Sponsored Enterprise (GSE). The maximum loan amount for conforming loans is known as the Conforming and High-Balance Loan Limits, which are adjusted annually by the Federal Housing Finance Agency (FHFA). Loans that conform to these standards can be purchased by Fannie Mae and Freddie Mac, which helps ensure liquidity in the Other Loan Participants and Key Third Parties in the Mortgage Ecosystem and standardizes the market. These loans typically adhere to the guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac if they are to be sold into the secondary market.
• Non-Conforming Loans: These loans do not meet Fannie Mae or Freddie Mac guidelines, often because they exceed the conforming loan limits or have other characteristics that fall outside the GSEs' criteria. An example of a non-conforming loan is a Jumbo Loan.

Key Characteristics

Conventional loans offer flexibility in terms and conditions, but generally require stronger borrower qualifications. Key characteristics include:

• Credit Requirements: Generally require higher credit scores and lower debt-to-income ratios compared to government-backed loans.
• Down Payment: While 20% down is traditional to avoid Private Mortgage Insurance (PMI), many conventional loans are available with lower down payments (e.g., 3% or 5%).
• Private Mortgage Insurance (PMI): If the borrower's down payment is less than 20% of the home's purchase price, lenders typically require Private Mortgage Insurance (PMI) to protect themselves against default. PMI can often be canceled once sufficient equity is built.

Interest Rate Structures

Conventional loans can come with various interest rate structures, with the most common being fixed-rate mortgages:

• Fixed-Rate Mortgage (FRM): In a Fixed-Rate Mortgage, the interest rate remains constant for the entire term of the loan. This provides borrowers with predictable monthly principal and interest payments, making budgeting easier and protecting them from potential interest rate increases.
  • Common Fixed-Rate Terms: The most common terms for fixed-rate mortgages are 30-year and 15-year.
    • 30-year Fixed-Rate Mortgage: Offers lower monthly payments due to the extended repayment period, but typically results in more interest paid over the life of the loan.
    • 15-year Fixed-Rate Mortgage: Features higher monthly payments but allows borrowers to pay off the loan faster and incur less total interest.
  • Market Data: The Primary Mortgage Market Survey (PMMS), conducted by Government Sponsored Enterprise (GSE), regularly tracks average interest rates and associated fees and points for fixed-rate mortgages. Historical data shows 30-year FRM rates fluctuating significantly over time, ranging from approximately 7.16% to 18.63% with points from 0.80 to 2.70 in the provided dataset. This stability in monthly payments is a key advantage, especially in volatile interest rate environments.
• Adjustable-Rate Mortgage (ARM): Conventional loans can also be structured as ARMs, where the interest rate can change over time based on an index.

Loan Modification

A conventional mortgage loan modification is a change to the original terms of a conventional mortgage loan, typically undertaken to make the loan more affordable for a borrower experiencing financial hardship. These modifications can involve altering the interest rate, extending the loan term, or changing the principal balance.

For conventional mortgage loans backed by Fannie Mae, servicers are required to use the specific Fannie Mae Modification Interest Rate when evaluating a borrower for a loan modification. This ensures that modifications for Fannie Mae-backed loans adhere to standardized guidelines and reflect current market conditions as determined by Fannie Mae.

Loan modifications are a key tool in Mortgage Servicing to prevent foreclosure and help borrowers sustain homeownership.

Related Guidelines

The requirements outlined in the Government Sponsored Enterprise (GSE) exhibit specifically apply to properties securing first lien conventional mortgage loans.