What characterizes a conventional loan?

A conventional loan is characterized primarily by the fact that it is a mortgage not insured or guaranteed by the government. This means that it is funded by private lenders and conforms to specific guidelines set by Fannie Mae and Freddie Mac, but it doesn’t have the backing of federal entities like FHA or VA loans. Because of this, the underwriting guidelines for conventional loans can vary significantly and often require stronger credit scores and more stringent financial documentation compared to government-backed loans.

It’s also noteworthy that the absence of government insurance means that lenders assume more risk with conventional loans, which can affect the terms and conditions associated with them, such as down payments and interest rates. Furthermore, although some conventional loans do allow for low or even no down payment options under certain conditions (like with private mortgage insurance), it is not a defining characteristic of all conventional loans. Rather, the absence of government backing is what distinctly categorizes them as conventional.