Conventional loans are typically the most general loan options when purchasing a home. Split into two separate categories, Conventional home loans can either be “conforming” or “non-conforming.” Conventional loans are also loans that aren’t backed by government agencies (such as FHA, VA or USDA). However, they are backed by the government-sponsored agencies (GSEs – which differ from actual government agencies), Fannie Mae and Freddie Mac.
Conforming or Non-Conforming
A conforming conventional loan is one that is backed by one of the government-sponsored enterprises, such as Fannie Mae or Freddie Mac. Most loan maximums for conforming conventional loans are $424,100, in most regions. Non-conforming loans are loans that don’t meet the requirements set in place by Freddie Mac and Fannie Mae, usually because the loan amounts exceed the loan maximum amount. These particular loans are referred to as “Jumbo Loans” and are usually loans with higher interest rates than those that conform to GSE requirements.
Fixed-Rate & Adjustable-Rate Mortgages
Typically, conventional loans are also going to be what are considered “fixed-rate” mortgages. This means that the interest rate on the mortgage will not fluctuate or change for a certain amount of time, not necessarily for the entire life of the loan. There are also “adjustable-rate” loans that don’t adhere to a standard fixed rate. These loans have an interest rate that is only fixed for several years at the beginning of the life of the loan. It then fluctuates according to how well the market is doing – which could be riskier than a fixed rate. In a case where the market isn’t doing so well, interest rates could jump up to be pretty high.