Which type of loans can typically be bought by government-backed mortgage companies?

Government-backed mortgage companies, such as Fannie Mae and Freddie Mac, typically focus on the purchase of conventional loans. Conventional loans are those that conform to the guidelines set by these government-sponsored enterprises (GSEs), which include limits on loan amounts and borrower qualifications.

These types of loans are attractive to investors because they are considered less risky when compared to other categories, such as subprime loans, which are extended to borrowers with lower credit ratings and have a higher likelihood of default. While jumbo loans exceed the conforming loan limits and are not eligible for purchase by these GSEs, and asset-backed securities are a different investment vehicle entirely, conventional loans align with the criteria outlined by the GSEs, making them suitable for purchase. This mechanism helps stabilize the housing market by providing liquidity and standardization to the lending process, ensuring that a broad range of borrowers can access mortgage financing.