What Are Conventional and Jumbo Loans?

A conventional loan is a loan secured by a government entity or by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two large companies that specialize in trading mortgages. Conventional loans are usually used for the purchase or refinance of single family homes. Conventional loans that follow the limits and guidelines of Fannie Mae and Freddie Mac are referred to as conforming loans. Any loan that does not do this is referred to as non-conforming. Although a loan may be non-conforming, it can still be considered a conventional loan.

A singe-family first mortgage loan amount limit is reviewed and revised each year by Fannie Mae and Freddie Mac. This price reflects the national average price of single family homes in the current market. This limit applies to all conventional loans after January 1st of the declared year.

The common structures of a conventional loan include fixed-rate, adjustable-rate and balloon loans. Any loan that exceeds the limit that Fannie Mae and Freddie Mac set forward is referred to as a jumbo loan. Jumbo loans have higher interest rates and many more requirements than that of a conventional loan.

There are many things that determine the rate of a conventional loan. The main things that determine interest rates are a borrower's funds, credit history and employment background. More factors include the location, type and condition of the property that the loan is being used for.

A borrower should always shop around for the best loan and keep track of interest rates.