Resources > Glossary > Conventional Loan

Glossary of Notary Public, Mortgage, Signing Agent, and Loan Signing Terms.

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Common Terms 1   Common Terms 2

Conventional Loan

Function: noun

There are various types of conventional loans. There are fixed rate mortgages, conforming and non-conforming loans, and jumbo loans. Conforming loans must meet the specifications of Fannie Mae or Freddie Mac. Conventional loans are popular with lenders because they can be sold to other parties in a secondary market. The majority of lenders sell most of their conventional loans in the secondary market instead of keeping them in their portfolio. Some advantages of conventional loans may include that lenders might be more flexible about reducing or elminating certain fees. The lender might be more flexible about what they would accept as collateral such as other properties or vehicles. The lender could self-insure a conventional loan instead of having the borrower get traditional mortgage insurance from a large company. The lender might be willing to finance closing costs in exchange for a slightly higher interest rate. Some disadvantages of conventional loans might be that the down payment would usually be higher than other types of loans. Origination fees might be higher as well since they would be determined by the lender. The lender would also have more flexibility to determine clauses within the mortgage regarding pre-payment penalties, or acceleration clauses. One major characteristic to understand in a conventional loan is that the rules for the loan are largely governed by the company who will be purchasing the loan, rather than by the company who sells the loan. There are many standard general secondary market rules, that if followed, make it easy to sell a conventional loan.

Definition 1:
A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FMHA) would be considered a conventional loan.