Understanding What is a Conventional Home Loan

Posted by Ethan Hunter on August 30th, 2008 filed in Home Mortgage Tips

When ever someone realizes I know about home loans, I get asked the same questions over and over - ‘What is a conventional home loan?’, ‘What’s the difference?’ ‘What is a conventional home loan good for? Is it better?’. Clearly, the government isn’t doing enough to try to educate its masses on what loans are!

You can get your answers right here.

So, What is a Conventional Home Loan?

You probably already know that home loans can be confusing. However, when it comes to understanding what is a conventional home loan, this article will help decipher the information.

Basically, a conventional home loan is any sort of loan or lender agreement that’s not backed fully by the VA (Veterans Administration), or fully protected by the FHA (The Federal Housing Administration). But that’s about where the basics end!

If you’re still wondering on the specifics on your question - what is a conventional home loan - don’t worry. I’m not done explaining it quite yet!

There are several different types of conventional home loans, as the term is fairly broad, and covers quite a bit.

For instance: Fixed Rate Mortgage (FRM)

This fixed rate conventional home loan is a very common one and the borrower will have a locked in interest rate for the life of the loan.

With this, you pay the principle on the loan for the amount you borrowed. Then, the interest rate that was locked into, never changes until the loan is paid off in full. This means every month, the amount of your mortgage payment never changes.

However, for what is a conventional home loan, there are many more questions that need to be addressed.

For example, a conventional home loan includes: A Conforming Home Loan

This is where the borrower and the lender agree to go with rules that may have been set by a federally run organization. This may be Fannie Mae or Freddie Mac. These loans are not approved or denied by either place, they are just really there.

It will benefit the lender more to have this, because the lender can sell your loan to other companies and receive the money that you would pay to them later. So they get the money faster.

There is the: Jumbo Home Loans

With this loan, the concept is simple. Typically, these loans are quite large, meaning they go beyond normal purchase limits outlined by Freddie Mac or Fannie Mae. However, the interest rates are often much higher and to get the loan, a private investor is involved.

The Bottom Line

I hope that you get an understanding of the basics and you will not be wondering what a conventional home loan is anymore.