What type of loan is a conventional loan?

A conventional loan is characterized as a mortgage that is not backed by a government agency. This means that it does not have the guarantees or protections provided by federal programs such as FHA (Federal Housing Administration), VA (Veterans Affairs), or USDA (U.S. Department of Agriculture) loans, which are aimed at specific borrower situations or property types.

Conventional loans are typically secured through private lenders or banks and can come with various terms and conditions, including fixed or adjustable interest rates. Since they operate within the cottage industry of private lending, these loans often adhere to stricter credit standards compared to government-backed loans, where the risk is shared by the agency involved.

The distinction is crucial, as it helps borrowers understand their options and the implications of using conventional financing versus government-backed loans. Key benefits of conventional loans may include fewer restrictions on the types of properties that can be financed and potentially fewer costs associated with mortgage insurance, depending on the down payment made by the borrower.