What characterizes a conventional loan?

A conventional loan is characterized as a type of mortgage that is not backed by a government agency. This means that these loans are typically offered by private lenders and financial institutions, and they are based on the borrower’s creditworthiness and ability to repay the loan, rather than any government insurance or guarantee.

Since conventional loans are not insured or guaranteed by federal entities such as the FHA (Federal Housing Administration), VA (Veterans Affairs), or USDA (United States Department of Agriculture), they usually require higher credit scores and down payments compared to government-backed loans. Borrowers seeking a conventional loan must demonstrate strong financial responsibility to qualify.

In contrast, options that describe loans guaranteed by the government or specifically limited to first-time homebuyers do not accurately represent conventional loans. Additionally, while many conventional loans can have a fixed interest rate for 30 years, this is not a defining characteristic of all conventional loans; they can also come with variable interest rates and different term lengths. Therefore, the defining feature of a conventional loan is that it operates within the private sector without government backing.