Conventional loans are loans that are not part of a government loan program
Conventional loans fall into two categories:
1. Conforming Loans
Conforming loans have maximum loan amounts that are set by the government. Fannie Mae or Freddie Mac (companies that provide backing for conforming loans) are the entities that set the eligibility requirements and other parameters for conforming loans.
Conforming loans must meet the conforming loan limits set by the Federal Housing and Finance Agency (FHFA). You can look up the current loan limit in your county here: conforming loan limit map set by the Federal Housing and Finance Agency (FHFA).
2. Non-conforming loans
A non-conforming loan is anything that falls outside of the conforming loan requirement, including all government-backed and jumbo loans. Non-conforming loans are less standardized. As a result, eligibility, pricing, and features can vary.
Examples of conventional loans
Fixed-rate mortgages
Fixed-rate mortgages are the most popular mortgage program in the country. They maintain a fixed interest rate for the life of the loan. This mortgage option offers predictable payments and is the best option for a homebuyer who plans to stay in their home for a long time.
Adjustable rate mortgages (ARMs)
Adjustable rate mortgages (ARMs) or variable rate mortgages are mortgages with a variable interest rate. ARMs allow borrowers to start with a lower introductory rate which provides a lower monthly payment, and then after the initial fixed period, the rate adjusts yearly based on the performance of an index. In addition, ARMs have rate caps that prevent the interest from going up or down past a certain point. An ARM is a good option for a homebuyer who needs a lower payment and can manage the fluctuating interest rate.
