Conforming vs Conventional Loans

Conform

If you have ever applied for a mortgage, you may have heard lenders talk about loans. You might wonder what the difference is between conforming and conventional loans

If you are a mortgage lender, you know about loans. You understand the differences between conforming and conventional loans. However, knowing these terms does not always mean they are the same.

A lot of confusion around conforming mortgages stems from the fact that only conventional can be conforming. However, not all conventional (as you will soon see) are conforming mortgages.

So, what makes a loan conventional and what makes it conforming? Can a conventional be conforming?

Below we will discuss the differences between conforming vs conventional mortgages.

What Is A Conforming Loan?

Since the financial crisis of 2008, most consumers are familiar with the names Fannie Mae and Freddie Mac. These two government-related organizations gather mortgages. They were put into conservatorship by the Federal Housing Finance Agency (FHFA).

Fannie Mae and Freddie Mac play important roles in housing and financial markets. They buy mortgages, package them into mortgage-backed securities, and sell these to investors.

A conforming mortgage refers to a mortgage that meets Fannie Mae and/or Freddie Mac’s purchase requirements.

Most lenders sell conforming mortgages to the secondary market. The sale usually happens a few months after the closing. Lenders may even take up to two months of escrows to cover this transition. Lenders choose to sell off these loans to increase liquidity, similar to that of a revolving line of credit.

However, just because a loan is sold doesn’t always mean the servicing of it necessarily changes. Lenders can receive income for administering and servicing the debt, often referred to as servicing rights.

An example of servicing responsibilities includes collecting monthly payments and maintaining escrows when needed. It also involves providing information, notices, a copy of the note, and disclosures to the borrowers.

Types of Conforming Loans

Conforming loans are called conforming because they conform to Fannie Mae and Freddie Mac guidelines. Once a conventional has met this standard, then the conventional loan is now conforming. Not every conventional thought is conforming, as these loans may not meet the Fannie Mae or Freddie Mac standard.

A conforming mortgage can be offered as either a fixed-rate or an adjustable-rate. Adjustable-rate mortgages are also referred to as variable-rate mortgages.

Fixed-rate mortgages inherently have an interest rate that is constant, meaning it doesn’t change over the life of the loan.

Adjustable-rate mortgages (ARMs) may start with a fixed interest rate for a set time. After that, the repayment terms let the interest rate change. The rate can go up or down, but there are limits on how much it can change over time. interest rate to adjust (either up or down, with certain periodic and lifetime caps) on a predetermined schedule. Please see your note for details, if applicable.

The increase or decrease is based on an index plus a set margin. The index used for ARM rates is now:

Secured Overnight Financing Rate or (SOFR)

The Previous indices used were:

London Interbank Offer Rate (LIBOR)
11th District Cost of Funds (COFI)
Moving Treasury Average (MTA)

Fixed-rate mortgages are often advantageous for borrowers looking for a more stable or predictable monthly payment.

Adjustable-rate mortgages can sometimes provide better rates in the short term. This can help borrowers who want to pay off their mortgage quickly.

Either option can be utilized for a purchase or refinance (both rate-term or cash out) transaction.

What is a Non-Conforming Loan?

Conventional mortgages can be conforming, but they do not always meet the rules set by Fannie Mae and Freddie Mac. Thus, conventional mortgages can also be non-conforming mortgages.

A mortgage may be non-conforming for two main reasons. First, it can be bought by another entity. Second, the loan may not meet the standard conforming limits.

Types Of Non-Conforming Loans

The two best examples of non-conforming mortgages are government-backed loans and jumbo mortgages.

As the name suggests, government-backed mortgages are loans that are insured by the federal government in some capacity.

In most cases, they are insured up to a certain threshold, protecting the lender in the event a borrower defaults on the debt. This lowers the risk of the lender who can then offer more favorable repayment terms to the borrower(s).

A few examples of government-backed mortgage programs are FHA, USDA, and VA loan programs. Many of these offer lower down payment requirements and more flexible underwriting criteria.

Jumbo loans are mortgages that go beyond the loan limit set by the FHFA. They are not eligible for purchase by Fannie Mae and Freddie Mac due to various factors.

Jumbo loans usually have higher amounts, as the name suggests. Because of this, they are often seen as riskier than conforming loans. This usually means that certain lenders may require more rigorous credit standards and eligibility criteria.

Note that both government-backed and jumbo mortgages can both be offered as fixed-rate or adjustable-rate mortgages. However, since they do not meet the purchase criteria of Fannie Mae or Freddie Mac, they are not conforming loans.

Comparing Conforming Vs Non-Conforming Options: Pros and Cons

If you are looking for a new mortgage, deciding between a conforming or non-conforming option can be tricky.

MortgageQuote.com can help borrowers like you look at the pros and cons of different mortgage options. They can also highlight key benefits that match your specific goals.

Benefits of Conforming Loans

Conforming mortgages certainly have some benefits over their non-conforming counterparts. For starters, conforming mortgages have fairly standard qualification requirements. While Fannie Mae and Freddie Mac are two separate entities, their underwriting criteria and eligibility requirements align very closely.

While individual lenders may have additional underwriting overlays, in general most conforming loans require similar criteria for approval. This also makes it easier for borrowers to compare lenders. They can shop around to find the best rate and repayment terms.

Additionally, conforming conventional loans are probably the most widely offered solution that consumers can take advantage of. This is partly because these loans have less risk. They are sold in the secondary market instead of staying on the lender’s books.

Many lenders offer conforming conventional mortgages. This gives consumers more choices about who they want to work with.

Lastly, conforming mortgages usually have lower interest rates than non-conforming options. However, this is not always true.

Benefits of Non-Conforming Loans

Non-conforming mortgages can be ideal programs for clients, some may even offer lower rates than conforming. The only difference is that these programs do not meet the requirements for a conforming mortgage. In other words, these loans do not follow the standards set by Fannie and Freddie.

In fact, there are several benefits to going with a non-conforming mortgage solution. In some cases that might be your only option.

Generally, government-backed non-conforming loans can offer lower down payment requirements compared to conforming conventional loans.

Some solutions may even waive a down payment altogether for borrowers who meet certain eligibility criteria. Most jumbo mortgage providers will generally require a down payment.

Jumbo mortgage options let borrowers take out larger loans beyond the standard limits. This is possible if the applicant can manage the debt. This can be beneficial for those transactions where the subject is a more expensive or unique piece of real estate.

Non-conforming mortgages are less strict about the types of properties used as collateral. This is different from conforming mortgages. The same applies to qualifying credit requirements. This makes non-conforming mortgage solutions more personalized and flexible.

Conforming Vs Conventional Loans

What is Needed for a Conventional Loan?

There are a number of different requirements when it comes to taking out a conventional loan, including the following:

Down Payment

The down payment requirement will vary for each person. It depends on factors like credit score, property type, and loan amount. It also matters if the property is a primary home, a second home, or an investment. The type of loan you are getting is important too.

If you earn up to 80 percent of the median income in your area, you might qualify for Home Ready or Home Possible programs. Some mortgage programs, like VA and USDA, may require a minimum down payment or none at all. However, you will still need enough money for closing costs and possibly other expenditures.

If the property you are buying is not a single-family home, you may need a larger down payment. This applies if the property has more than one unit or if it is a second home or investment property. The required down payment can vary based on the program.

Jumbo loans of up to $3,000,000 are often available from top lenders. However, the larger the loan, the harder it may be to qualify. Mortgages above $3,000,000 may require more documentation and reserves depending on the scenario. A larger loan may need a bigger down payment. Please ask about the documents you will need. This will help you set your expectations.

Unlocking Mortgage Options: Pros and Cons of Conforming and Conventional Loans

Buying a home is an exciting yet complex process, and one of the biggest decisions you'll make is selecting a mortgage. With so many options available, it can be overwhelming to navigate through the sea of choices. Two common types of mortgages are conforming and conventional loans. In this article, we'll explore the pros and cons of each, helping you make an informed decision.

Conforming loans are mortgages that meet the criteria established by Fannie Mae and Freddie Mac, the government-sponsored enterprises. They usually have lower interest rates. They are great for borrowers with good credit and a steady income. Conventional loans are not backed by the government. They may need a higher credit score and a larger down payment.

It is important to understand the pros and cons of conforming and conventional loans. This knowledge helps you find the option that fits your financial goals and situation. By considering factors like interest rates, credit requirements, and down payments, you can make a smart choice. This will help you find the mortgage option that fits your needs best.

No matter what type of loan you choose, it's important to learn about your options. Take your time before committing to a mortgage. So, let's dive into the pros and cons of conforming and conventional loans and find the perfect fit for you.

Understanding conforming loans

Conforming mortgages meet the criteria established by Fannie Mae and Freddie Mac, the government-sponsored enterprises. They are designed to make it easier for borrowers to obtain financing. The criteria include factors such as loan limits, credit requirements, and debt-to-income ratios. Conforming loans usually have lower interest rates than other types of mortgages. This makes them a good choice for many borrowers.

One of the advantages of conforming loans is that they offer competitive interest rates. Because these loans are backed by Fannie Mae and Freddie Mac, lenders are more likely to offer lower rates. This is especially true for borrowers who meet the criteria. This can result in significant savings over the life of the loan.

Another benefit of conforming mortgages is that they often have more flexible credit requirements. A good credit score is important, but borrowers with a lower score can still qualify for a conforming loan. This can be especially helpful for first-time homebuyers who may not have an extensive credit history.

However, conforming mortgages also have their drawbacks. One of the main disadvantages is that they have stricter limits on mortgage amounts. These limits vary depending on the location of the property, with higher limits in areas with higher housing costs. If you're looking to purchase a more expensive home, a conforming loan may not provide enough financing.

Additionally, conforming mortgages typically require a downpayment, although the amount required can vary. While some mortgages may allow for a lower down payment, such as 3% or 5%, others may require a larger down payment. This can be a significant upfront cost that borrowers need to consider when choosing a mortgage.

Pros of conforming loans

Conventional loans, on the other hand, are not backed by any government agency. They are offered by private lenders and are subject to their own set of criteria. Conventional loans may have higher interest rates than conforming loans. However, they provide more flexibility with loan amounts and down payment requirements.

One of the advantages of conventional loans is that they don't have strict limits on loan amounts. This means that borrowers wanting to buy a more expensive home can still get a conventional loan. This can be particularly beneficial for those who are looking to buy in high-cost areas.

Conventional mortgages also offer more flexibility when it comes to down payments. While some lenders may require a higher down payment, such as 20%, others may allow for a lower down payment. This can be advantageous for borrowers who don't have a large amount of cash available upfront.

However, there are some downsides to conventional mortgages as well. One of the main disadvantages is that they often require a higher credit score compared to conforming loans. Lenders usually prefer borrowers with a credit score of 620 or higher. Some may want a score of 660 or even 700. This can make it more challenging for borrowers with a lower credit score to qualify for a conventional loan.

Another drawback of conventional loans is that they can have higher interest rates compared to conforming loans. This is because they are not backed by a government agency, making them slightly riskier for lenders. However, the difference in interest rates might not be large. This is especially true if you have a good credit history and a steady income.

Cons of conforming loans

When comparing conforming and conventional loans, it's important to consider several factors. One of the main factors to consider is interest rates. While conforming loans generally offer lower interest rates, this may not always be the case. It's important to shop around and compare rates from different lenders to ensure you're getting the best deal.

Credit requirements are another important consideration. If you have a strong credit history, you may qualify for both conforming and conventional loans. However, if your credit score is lower, you may have more options with a conforming loan. It's important to review your credit report and take steps to improve your credit score if necessary.

Down payment requirements also play a significant role in choosing between conforming and conventional loans. If you don't have a lot of cash for a down payment, a conforming loan might be a better choice. However, if you're able to make a larger down payment, a conventional loan may offer more flexibility.

Other factors to think about are loan limits, debt-to-income ratios, and the type of property you want to buy. It's important to work with a knowledgeable lender. They can guide you through the process. They will help you find a mortgage option that fits your financial goals and situation.

Exploring conventional loans

There are several common misconceptions about conforming and conventional loans that are important to address. One misconception is that conforming loans are only for first-time homebuyers or those with lower income. While these loans can be a great option for first-time buyers, they are not limited to this group. Conforming loans are available to anyone who meets the rules set by Fannie Mae and Freddie Mac. This is true for all, no matter their income or past homeownership.

Another misconception is that conventional loans are only for borrowers with a high income and excellent credit. Conventional loans do have higher credit score requirements. However, they are not just for borrowers with high incomes. You can qualify for a conventional loan if you meet the lender's criteria, no matter your income level.

It's also important to note that conforming and conventional loans are not the only options available. There are also government-backed loans, such as FHA loans and VA loans, that may be more suitable for certain borrowers. It's important to explore all your options and consider the pros and cons of each before making a decision.

Pros of conventional loans

Choosing the right mortgage is a crucial step in the homebuying process. By knowing the advantages and disadvantages of conforming and conventional loans, you can make a smart choice. This choice should match your financial goals and situation. Factors such as interest rates, credit requirements, and down payments should all be considered when weighing your options.

Remember to educate yourself and explore all available options before committing to a mortgage. Working with a knowledgeable lender can help you through the process. They can also answer any questions you have. With the right information and help, you can find the mortgage option that fits your needs. This will help you take a confident step toward owning a home.

Whether you choose a conforming loan with competitive interest rates or a conventional loan with higher limits, think carefully. Both types have their pros and cons. Consider the flexible credit requirements and down payment options before making a decision. By doing so, you'll be well on your way to unlocking the mortgage option that is the perfect fit for you.

Cons of conventional loans

No matter what type of loan you choose, it’s important to learn about your options. Take your time before committing to a mortgage. So, let's dive into the pros and cons of conforming and conventional loans and find the perfect fit for you.

Comparing conforming and conventional loans

Conventional loans offer several advantages that make them an appealing option for many borrowers.

1. Flexibility: One of the biggest advantages of conventional loans is their flexibility. Unlike conforming loans, which have strict guidelines set by Fannie Mae and Freddie Mac, conventional loans are not bound by these requirements. This means lenders can set their own terms and conditions. This gives borrowers the chance to negotiate and customize their loans to meet their needs. conditions, allowing borrowers to negotiate and customize their loan to fit their specific needs.

2. Higher Loan Limits: Conventional loans often have higher limits compared to conforming. This is especially helpful for borrowers who want to buy homes in expensive areas. In these places, conforming loan limits may not be enough. With higher loan limits, borrowers have more choices. They can finance larger purchases without needing alternative financing methods.

3. No Mortgage Insurance: Another advantage of conventional loans is the possibility of avoiding mortgage insurance. Conforming loans usually need mortgage insurance if borrowers put down less than 20%. However, conventional loans let borrowers skip this cost if they meet the lender's requirements. This can result in significant savings over the life of the loan.

What to consider between conforming and conventional loans

While conventional loans offer many benefits, there are also some drawbacks to consider before making a decision.

1. Stricter Requirements: Unlike conforming loans, conventional loans usually have stricter rules for credit scores and down payments. Borrowers may need a higher credit score and a larger down payment to qualify for a conventional loan. This can make it harder for some borrowers. This is especially true for those with limited funds or poor credit histories.

2. Higher interest rates: Conventional loans are not backed by the government. Because of this, lenders may charge higher interest rates compared to conforming loans. This means that borrowers could end up paying more in interest over the life of the loan. It's essential to compare interest rates from different lenders to ensure you're getting the best possible deal.

3. Less Flexibility for Non-Traditional Borrowers: Conventional loans might not work well for borrowers with non-traditional income. This includes people who are self-employed. Lenders often require consistent and verifiable income, making it challenging for these borrowers to qualify. In such cases, conforming loans or alternative financing options may be more suitable.

Conclusion: Making the right choice for your mortgage

When deciding between conforming and conventional loans, there are several factors you should take into consideration:

1. Interest Rates: Compare the interest rates offered by different lenders for both conforming and conventional loans. Look for the best possible rate to ensure you're getting the most favorable terms.

2. Credit Score: Assess your credit score and determine if it meets the requirements for a conventional loan. If your credit score is lower, you may have more success with a conforming loan.

3. Down Payment: Look at your finances and decide how much you can afford for a down payment. This will help you determine which loan option is more feasible for you.

4. Loan Limits: Consider the loan limits in your area and assess whether they align with your home buying needs. If you're looking to purchase a high-cost property, a conventional loan may be the better choice.

5. Mortgage Insurance: Check if you can meet the down payment requirements. This will help you avoid mortgage insurance on a conventional loan. If not, evaluate the cost of mortgage insurance for conforming loans and consider its impact on your monthly payments.