Conforming vs Conventional Loans

Conforming

If you have ever applied for a mortgage, you may have heard lenders refer to loans and wonder what is the difference between conforming vs conventional loans?

But if you are a mortgage lender, you are fully aware that referring to a loan and know the differences between conforming vs conventional, knowing doesn’t always mean the same thing.

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 quasi-government entities are mortgage aggregators that were placed into conservatorship under the oversight of the Federal Housing Finance Agency (FHFA).

Fannie Mae and Freddie Mac have deep roots within housing and financial markets and serve the purpose of purchasing mortgages, packaging them into mortgage-backed securities, and selling those mortgages 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, but are not limited to, collecting monthly payments, maintaining escrows (where applicable), as well as 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) on the other hand may have an initial period where the rate is fixed, but after a certain point the repayment terms allow for the 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.

On the other hand, adjustable-rate mortgages can sometimes offer more favorable rates in the short term, benefiting those borrowers who are looking to pay off their mortgage within a specific time horizon.

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

What is a Non-Conforming Loan?

While conventional mortgages can certainly be conforming, they do not always meet the conforming criteria outlined by Fannie Mae and Freddie Mac. Thus, conventional mortgages can also be non-conforming mortgages.

The two main reasons why a mortgage may be considered non-conforming is that it can either be purchased by another entity or the loan does not fall within the standard conforming limits.

Types Of Non-Conforming Loans

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

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

In most cases, these loans 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 loan programs are FHA, USDA, and VA loan programs. Many of these offer lower down payment requirements and more flexible underwriting criteria.

Jumbo’s are non-conforming mortgages that exceed the loan limit set by the FHFA, based on a variety of factors, that make them ineligible for purchase by Fannie Mae and Freddie Mac.

Since the jumbo’s usually carry higher loan amounts (as the name entails), they are often seen as carrying more risk compared to conforming counterparts. 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, because they do not meet the purchase criteria of either Fannie Mae or Freddie Mac, they wouldn’t be considered a conforming loan.

Comparing Conforming Vs Non-Conforming Options: Pros and Cons

If you are in the market for a new mortgage figuring out whether to go with a conforming or non-conforming option can be a bit tricky.

Thankfully, New Century Mortgage has been able to help borrowers just like you weigh the pros and cons of multiple mortgage financing options, outline key benefits that align with your particular end-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 simplifies the comparison process if borrowers want to shop lenders 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 partially due to the fact that these loans carry less risk, as they are being sold off into the secondary market as opposed to remaining on the lender’s books.

Since there are a multitude of lenders that offer conforming conventional mortgages, consumers have more choices on who they want to do business with.

Lastly, while it is not always the case, in general conforming mortgages can often offer a lower interest rate compared to other non-conforming options.

CONFORMING VS CONVENTIONAL LOANS

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 the programs simply don’t meet the requirements to be a conforming mortgage, another words these loans do not ‘conform’ to the standards set out 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.

However, jumbo mortgage options allow borrowers the flexibility of taking out a larger loan amount outside the conforming loan thresholds, assuming the applicant can carry the debt. This can be beneficial for those transactions where the subject is a more expensive or unique piece of real estate.

Unlike conforming mortgages, non-conforming mortgage solutions are less restrictive with the types of real property being used as collateral. The same is true with respect to qualifying credit requirements, making non-conforming mortgage solutions much more individualized and flexible.

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 requirement for a down payment will differ from person to person depending on such criteria as credit score, type of property, loan amount, if it is primary, 2nd home or investment and the sort of subject or loan you are getting.

For instance, if you are making no more than 80 percent of the median income in your location, you might qualify for Home Ready or Home Possible. There are other mortgage programs that could require a set minimum or even no down payment requirement such as VA and USDA. However, you will still need enough money for closing costs and possibly other expenditures.

If the property you are purchasing is not a single-family home, i.e. it has more than one unit or if it is a second home or investment property you may need to have a larger down payment depending on the program.

Jumbos generally up to $3,000,000 might be accessible through top lenders, however the larger the loan amount, the harder it may prove to qualify. Mortgages above $3,000,000 may require more documentation and reserves depending on the scenario. A larger loan amount may require a larger down payment as well, so please make sure to inquire to see what documentation might be needed and other items to properly 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 typically have lower interest rates and are ideal for borrowers with a strong credit history and a stable income. On the other hand, conventional loans are not backed by any government agency and may require a higher credit score and a larger down payment.

Understanding the advantages and disadvantages of conforming and conventional loans is essential to find the option that aligns with your financial goals and circumstances. By weighing factors such as interest rates, credit requirements, and down payments, you can make a confident choice and unlock the mortgage option that best suits your needs.

Regardless of the loan type, it's important to educate yourself and explore your options carefully 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 loans are mortgages that meet the criteria established by Fannie Mae and Freddie Mac, the government-sponsored enterprises. These loans 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 typically have lower interest rates compared to other types of mortgages, making them an attractive option for many borrowers.

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

Another benefit of conforming loans is that they often have more flexible credit requirements. While a good credit score is still important, borrowers with a slightly lower credit score may 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 loans also have their drawbacks. One of the main disadvantages is that they have stricter limits on loan 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 loans typically require a down payment, although the amount required can vary. While some loans 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. While conventional loans can have higher interest rates compared to conforming loans, they offer more flexibility in terms of loan amount 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 who are looking to purchase a more expensive home can still secure financing through a conventional loan. This can be particularly beneficial for those who are looking to buy in high-cost areas.

Conventional loans 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 loans as well. One of the main disadvantages is that they often require a higher credit score compared to conforming loans. Lenders typically prefer borrowers with a credit score of 620 or higher, although some may require 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 may not be significant, especially if you have a strong credit history and a stable 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 large amount of cash available for a down payment, a conforming loan with a lower down payment requirement may be more suitable. However, if you're able to make a larger down payment, a conventional loan may offer more flexibility.

Other factors to consider include loan limits, debt-to-income ratios, and the type of property you're looking to purchase. It's important to work with a knowledgeable lender who can guide you through the process and help you find the mortgage option that aligns with your financial goals and circumstances.

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 criteria set by Fannie Mae and Freddie Mac, regardless of their income or previous homeownership status.

Another misconception is that conventional loans are only for borrowers with a high income and excellent credit. While it's true that conventional loans may have higher credit score requirements, they are not limited to borrowers with a high income. As long as you meet the lender's criteria, you can qualify for a conventional loan regardless of 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 understanding the pros and cons of conforming and conventional loans, you can make an informed decision that aligns with your financial goals and circumstances. 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 also be helpful in guiding you through the process and answering any questions you may have. With the right information and guidance, you can unlock the mortgage option that best suits your needs and take a confident step towards homeownership.

So, whether you choose a conforming loan with its competitive interest rates and flexible credit requirements or a conventional loan with its higher loan limits and down payment options, make sure to weigh the pros and cons carefully. 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

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 that lenders have more freedom to set their own terms and 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 beneficial for borrowers who are looking to purchase properties in high-cost areas where conforming loan limits may not be sufficient. With higher loan limits, borrowers have more options and can finance larger purchases without having to resort to alternative financing methods.

3. No Mortgage Insurance: Another advantage of conventional loans is the possibility of avoiding mortgage insurance. While conforming loans typically require mortgage insurance for borrowers who put down less than 20% as a down payment, conventional loans allow borrowers to avoid this additional cost if they can meet the lender's requirements. This can result in significant savings over the life of the loan.

Factors to consider when choosing 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, which have more lenient credit score and down payment requirements, conventional loans often have stricter eligibility criteria. Borrowers may need a higher credit score and a larger down payment to qualify for a conventional loan. This can make it more challenging for some borrowers, especially those with limited funds or less-than-perfect credit histories.

2. Higher Interest Rates: As conventional loans are not backed by any government agency, 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 may not be the best option for borrowers with non-traditional income sources or those 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: Evaluate your financial situation and determine how much you can afford to put down as 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: Determine whether you can meet the down payment requirements to 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.