University of Central Florida (UCF) REE3043 Fundamentals of Real Estate Practice Exam 4

Conventional loans are typically considered to be those that are not directly backed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). However, many conventional loans are structured in a way that allows them to meet the guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac. These entities purchase loans from lenders and package them into mortgage-backed securities for sale in the secondary market.

When a conventional loan qualifies for purchase by these government-backed entities, it often adheres to their guidelines regarding creditworthiness, loan limits, and borrower qualifications, which helps ensure the loan's marketability and security in the secondary market. This quality is crucial because it helps maintain liquidity and stability within the mortgage lending industry.

In contrast, loans that are backed by federal insurance or guarantees are usually government loans, and conventional loans are not designed with this characteristic. Additionally, while there are loans that may be more challenging to sell in the secondary market, many conventional loans are quite marketable when they comply with the set guidelines, so they are not generally considered to be difficult to sell. Therefore, the defining aspect of conventional loans in this context is the ability to meet the criteria for purchase by government-backed entities.