A conventional mortgage or conventional loan is any type of home loan that is not offered or secured by a government entity, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) or the USDA Rural Housing Service, but instead is available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Conventional loans offer excellent interest rates and do not require mortgage insurance when a 20% down payment is made. Conventional loans can be used to purchase a home with as little as 3% down and are the most common loans for borrowers with excellent credit.
Conventional loans are often erroneously referred to as conforming mortgages or loans. While there is overlap, the two are distinct categories. A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit, set annually by the Federal Housing Finance Agency (FHFA): In 2019, in most of the continental U.S., a loan must not exceed $484,350. So while all conforming loans are conventional, not all conventional loans qualify as conforming. A jumbo mortgage of $800,000, for example, is a conventional mortgage but not a conforming mortgage – because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
Currently, conventional mortgages represent around two-thirds of the homeowners’ loans issued in the U.S. The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities, which trade in a well-established forward market known as the mortgage TBA (to be announced) market. Many of these conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).