What does the term "conventional loan" signify in real estate financing?

The term "conventional loan" refers to a type of mortgage that is not insured or guaranteed by the government. This distinction is essential because it places conventional loans in a category separate from government-backed loans such as those insured by the Federal Housing Administration (FHA) or part of veterans' benefits programs.

In practical terms, this means that conventional loans typically follow the guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy and securitize mortgages. Because they are not backed by government entities, conventional loans may be subject to stricter credit requirements and guidelines compared to government-insured loans. The borrowing criteria, interest rates, and terms available can vary significantly based on the borrower's creditworthiness, making these loans a common choice for buyers who have strong credit profiles and sufficient down payment funds.

Understanding this context of conventional loans is crucial for both real estate professionals and buyers because it influences decisions regarding financing options.