A type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages, depending on market conditions and consumer trends are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages.

The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities, which trade in a well-established forward market known as the mortgage TBA (to be announced) market. Many conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).

There are two very strong arguments for using a conventional mortgage. First of all, they usually offer the lowest interest rates around for those who want to do a mortgage refinance or take out a new loan. Secondly, using a conventional mortgage instead of buying into a property with an FHA loan and only 3 to 5 percent equity means starting with more home equity; this is the best defense against a downturn in the housing market.

One percent may not seem like much but. If your mortgage is about to go underwater, it can be the difference between one inch of breathing room and death by drowning. With a 97 percent FHA loan, the same price deterioration translates into negative equity of 16 percent.

Many of today's foreclosures happen because people bought homes with little or no equity. Now they're unable to do a mortgage refinance, and selling doesn't raise enough cash to pay off their principal. While paying a big down payment is hard, at least it doesn't leave borrowers walking on thin ice in fear of losing their homes if prices dip.

When buying a new home or seeking a mortgage it is very common to come across several different kinds of loans and mortgage types, which can be quite confusing. One of the most used terms is the conventional loan or conventional mortgage.

A conventional mortgage usually does not go over the appraised worth or purchase price of the property by 75%, whichever is the least of the two. It is also the norm for a conventional mortgage to be a long term loan of thirty years since buying a home is considered a lifetime investment.

The conventional mortgage gets its name because it is the most common form of financing the purchase of a house and is “conventional,” i.e. not insured or guaranteed by the HUD, Veterans’ Administration or the Federal Housing Agency (FHA), which would make it a governmental loan or mortgage, although it can sometimes be privately insured for added security.

Fannie Mae and Freddie Mac aren’t approvers or disapprovers of loans, but are actually buyers and sellers of mortgages (mortgage trading companies) with their own set of stipulations. It is in the lender’s best interests to use conventional mortgages because they can sell them on to the two companies to get funds for other projects at a later date.

A common opposition to the conventional mortgage is the equitable mortgage or a Federal Housing Administration loan which allows you to buy the house with a down payment of up to 3 percent. It is the only governmental loan program offered to the general public, although the Veteran’s Administration is available specifically to veterans of the military.

When choosing a mortgage it is important to weigh up the pros and cons of conventional mortgage programs and the ones offered by the government. Only you know your personal circumstances and can make the right decision.