Conventional loans are based on guidelines set by private investors and are not guaranteed or insured by an agency of the federal or state government. These loans may be purchased and securitized by Government Sponsored Entities ("GSE") such as Fannie Mae and Freddie Mac or by other institutions participating in the secondary market. However, loans that are insured by VA or FHA are not conventional loans. Another way to think about conventional loans is that these are non-government loans.
A lender has the freedom to customize the features, pricing, and underwriting requirements of conventional loans. The greater the customization the less marketable the loan becomes in the secondary market. Since most lenders intend to sell loans in the secondary market, they don’t customize the loans and follow the underwriting guidelines of Fannie Mae, Freddie Mac, or of an investor whose loans are easily traded in the secondary market.
Updated: Jul 25, 2013