Definition
A mortgage that is not insured or guaranteed by a federal agency; many follow Fannie Mae and Freddie Mac rules.
What it means
A conventional loan is any mortgage not backed by FHA, VA or USDA. Most are conforming loans, which meet the standards of Fannie Mae and Freddie Mac and stay under the conforming loan limit that the Federal Housing Finance Agency sets each year by county. Loans above the limit are called jumbo loans and often have stricter requirements. Conventional loans can allow down payments as low as 3% for some buyers, but borrowers with less than 20% down usually pay private mortgage insurance, which can be canceled later. Credit score, debt-to-income ratio and down payment strongly affect the rate. Conventional loans can be used for primary homes, second homes and investment properties, while government-backed loans are mainly for primary residences.
Example
A buyer with a 760 score putting 20% down on a $400,000 home borrows $320,000 with no PMI. With 5% down, the loan is $380,000 and PMI is usually added until enough equity builds.
Illustrative numbers only. Your situation will differ.