What is a conventional loan characterized by?

A conventional loan is defined primarily by its lack of government insurance or guarantee. This means that these loans are not backed by any governmental entities, such as the Federal Housing Administration (FHA) or the Veterans Affairs (VA), which contrasts with loans that do carry such protections. Lenders offering conventional loans bear more of the risk associated with these loans because they rely solely on the creditworthiness of the borrower rather than any government backing.

This setup usually allows for a wide range of loan terms and conditions, including interest rates that can vary based on market conditions and the borrower's credit profile. Furthermore, conventional loans can be conforming or non-conforming; conforming loans adhere to guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac, while non-conforming loans do not.

Understanding this characteristic highlights the borrower’s responsibility to qualify based on their financial health without the safety net that government-backed loans provide. Thus, the lack of insurance or guarantee is a defining quality of conventional loans, setting them apart from other types of financing.