Conventional mortgage

You need to understand what a conventional mortgage is. Here’s what to know.

What is a conventional mortgage?

A conventional mortgage is a plain-vanilla home loan that’s ideal for borrowers with good or excellent credit. These can carry a fixed rate or carry an adjustable rate. They are offered through private banks and are not backed by government agencies such as the Federal Housing Administration and the Department of Veterans Affairs.

Deeper definition

Conventional mortgage loans are taken out to buy a home or refinance an existing home loan. Also known as traditional loans, these mortgages can carry a fixed rate, such as the 30-year fixed-rate mortgage, or a variable rate, such as the 5/1 adjustable-rate mortgage (ARM).

In addition, they follow guidelines set by Fannie Mae and Freddie Mac, companies that buy mortgages on the secondary market in the U.S.

However, conventional mortgage rates aren’t as good at loans backed by the FHA and VA. Still, these government-backed loans have restrictions that limit who can get them.

On the other hand, conventional mortgages place more risk in the hands of the bank or credit union, which can make them a bit more challenging to obtain for some borrowers.

Conventional mortgage example

Jim and Kathy decide to buy a home. They compare several loan types. Since they are not first-time homebuyers or veterans of the military, they can’t take out FHA or VA loans. They decide to use a conventional loan with a 30-year term and a fixed rate to buy their home.


More From Bankrate