What is a conventional loan?

A conventional loan is defined as a type of mortgage that is not backed or insured by any government agency, making it fundamentally different from government-backed loans such as FHA or VA loans. The key characteristics of a conventional loan include its adherence to specific guidelines set forth by financial institutions and government-sponsored enterprises like Fannie Mae and Freddie Mac. These guidelines often stipulate criteria such as loan limits, borrower creditworthiness, and debt-to-income ratios.

Conforming to these guidelines is essential, as it allows the loan to be sold on the secondary mortgage market, which can ultimately affect interest rates and the availability of mortgage funding. This means borrowers can benefit from potentially lower rates and more favorable terms if they meet the standard requirements. Therefore, option B accurately highlights the defining aspect of a conventional loan, emphasizing that it is not government-backed but meets established criteria.

Other options do not properly capture the essence of conventional loans; they either describe characteristics that may pertain to certain types of loans or fail to accurately reflect the non-governmental aspect that is central to defining a conventional loan.