What Are Conventional Mortgage Loans?

A conventional mortgage loan is a type of loan contract that is not insured or guaranteed by some type of governmental agency. In times past, conventional loans that were offered and supported by local banks, savings and loan associations, and credit unions were more or less the only types of mortgages available to prospective homebuyers. Typically, the lender who approved and serviced the loan would continue to hold the instrument until the debtor settled the balance in full, or a default took place the required foreclosure on the property.

Over time, conventional mortgage loans began to be traded in what is known as a secondary market. This approach allowed lenders to approve loans, then sell those loans to new owners, who would then enjoy the revenue stream generated as debtors made monthly installment payments on the debt. By using this approach, a local bank could recoup the investment in the original loan quickly, and use those proceeds to fund other loans that could also be sold in this market, making a small amount of profit off each one at the time of the sale. The new owners or organizations that purchased the conventional mortgage loans would over time also earn a small return from the investment as well as enjoy the steady revenue stream created by holding several active loans.

Conventional mortgage loans are typically classified as either conforming or non-conforming. The conforming loans are structured to follow the same guidelines as mortgages that are backed by a national or federal agency. For example, in the United States a conforming loan would not be guaranteed or insured by agencies like the Veterans Administration or the Federal Housing Administration, but the loan would tend to follow the guidelines issued by government-sponsored enterprises like Freddie Mac or Fannie Mae.

Non-conforming conventional mortgage loans do not follow the guidelines issues by government sponsored enterprises, and are also not insured or guaranteed by any governmental agency. One of the most common examples of a non-conforming loan is the jumbo loan. This term refers to a loan that is for an amount above the value that a governmental agency will insure or guarantee, and that usually has a rate of interest that is higher than the national average fixed rates supplied for mortgages that are in compliance with governmental guidelines.

When it comes to options with the interest applied, conventional mortgage loans may carry a fixed or adjustable rate, or provide for a combination of the two. Mortgages of this type may also be structured with balloon payments due at specific points in the life of the loan contract. When considering any loan that is classed as conventional, care to determine what type of backing or guarantee is provided by the lender is very important. If the guarantees provided with the option do not appear to be sufficient, going with a different type of mortgage loan may be a better approach.