Loans not guaranteed or insured by these agencies are known as conventional loans.  These loans adhere to Fannie Mae guidelines.  Fannie Mae, or Federal National Mortgage Association, is a corporation created by the federal government that buys and sells conventional mortgages. It sets the maximum loan amount and requirements for borrowers.

Usually, a conventional loan is a 30-year fixed rate mortgage.  That means it has a fixed interest rate for the 30 year term of the loan.  Conventional loans also typically require at least a 20 percent down payment.  For example, if a house costs $200,000, the lender will provide a loan for 80 percent of that amount.  So, $160,00 is financed through the lender and the borrower must pay $40,000 cash.

Conventional loans can have better interest rates than non-conventional loans and can be a great option for those with a 20 percent down payment.  However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage.  By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional loan.

At one point in our history, conventional loans were the only mortgage loans available and they were all made by local lenders such as banks, savings and loans, and credit unions. They kept and serviced these loans in their own portfolio until they were either paid in full or foreclosed on.

In the late 1930's, a secondary market was created which allowed these local lenders to sell their loans, getting the full payment much more quickly. Then the organizations that purchased the loans owned the agreement and collected payments from the borrower. Today it is very common for lenders to sell their loans to the secondary market.

Conventional loans may be "conforming" and "non-conforming". Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. Nonconforming loans don't meet Fannie Mae or Freddie Mac qualifications, but are also considered conventional.

Another category of loans, jumbo loans, falls outside of Fannie Mae eligibility but is also considered conventional. A jumbo loan is a loan above the maximum loan amount established by Fannie or Freddie and they usually have a higher interest rate.

The 2009 conforming loan limits remain at the limits set in 2006, 2007 and 2008. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling. If you live outside of the 48 contiguous United States (in Guam, the Virgin Islands, Hawaii, or Alaska), or the dwelling is for a two-family, three-family, or four-family configuration, you qualify for a larger loan limit.

Conventional loans can be fixed rate mortgage or adjustable rate mortgage with many multiple configurations such as balloon payments, Option ARMs, hybrid (combination of fixed and ARM) loans, and a wide range of payment periods.

Conforming Loans:

Conforming loans have terms and conditions that follow the guidelines set forth by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These loans are called "A" paper loans, or prime loans, and can be made to purchase or refinance homes (1-4 residential units). Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year. This limit is reviewed annually and, if needed, modified to reflect changes in the national average price for single-family homes.

Non-Conforming Loans:

Non-conforming loans are offered if the size of the loan or the borrower's creditworthiness does not meet conventional lending standards. These include jumbo loans and sub-prime loans. Loans that are above the maximum loan limit set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government-sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called sub-prime loans or "B" and "C" paper loans as opposed to "A" paper conforming loans. Sub-prime loans are offered to borrowers that may have recently filed for bankruptcy or foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "A" financing. Due to the higher risk associated with lending to borrowers that have a poor credit history, sub-prime loans typically require a larger down payment and a higher interest rate.