A mortgage conventional loan is a lender agreement that's not guaranteed or insured by the federal government under the Veterans Administration (VA) the Federal Housing Administration (FHA), or the Rural Housing Service (RHS) of the U.S. Department of Agriculture. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of government sponsored enterprises (GSE's) such as Fannie Mae or Freddie Mac as both Fannie Mae and Freddie Mac are stockholder-owned corporations and are not part of the federal government.
Conventional Loan History
At one point in the United States, conventional loans were the only mortgage loans available and they were all issued by local lenders such as banks, savings and loans, and credit unions. These private lenders kept and serviced these loans in their own portfolio until they were either paid in full or foreclosed on.
In the late 1930's, a secondary market was created which allowed these local lenders to sell their loans, getting the full payment much more quickly. Then, the organizations that purchased the loans owned the agreement and collected payments from the borrower. Today it is very common for lenders to sell their loans on the secondary market.
Types of Conventional Loans
Conventional loans may be "conforming" and "non-conforming". Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. The 2009 conforming loan limits remain at the limits set in 2006, 2007 and 2008. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling. If the purchase is made outside of the 48 contiguous United States (in Guam, the Virgin Islands, Hawaii, or Alaska), or the dwelling is for a two-family, three-family, or four-family configuration, larger values apply before the loan is no longer considered a conventional loan.
Nonconforming loans don't meet Fannie Mae or Freddie Mac qualifications, but that are still considered conventional. Jumbo loans are one example of a conventional loan that does not meet Fannie Mae or Freddie Mac guidelines. A jumbo loan is a loan with a dollar value above the maximum loan amount established by Fannie or Freddie. Jumbo loans usually have a higher interest rate.
Conventional loans can be fixed rate mortgages, adjustable rate mortgages, balloon mortgages, or hybrid loans. Almost any type of loan that you take, if not issued by a government entity, is considered a conventional loan.
Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.
In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $417,000 in 2006. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes.
Conventional Loan Limits
- One-family loans: $417,000
- Two-family loans: $533,850
- Three-family loans: $645,300
- Four-family loans: $801,950
Note: Maximum original loan amounts are 50 percent higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.