Conforming vs conventional loans: where they overlap and where they don’t

Let’s face it: the world of mortgage loans can be confusing. For first-time homebuyers in particular, the lingo itself can be hard to get straight. For instance, do you know what a conforming loan is? How about a conventional one? Chances are, you thought of them as the same thing.

Conventional loans are often confused with conforming loans. But while there is overlap, the two are distinct categories. Let’s dig a little deeper to define both types, shall we? Here’s all you need to know.

What is a conforming loan?

A conforming loan is any mortgage that meets the dollar limits set annually by the Federal Housing Finance Agency (FHFA), as well as the funding criteria of Fannie Mae and Freddie Mac—both federally backed home mortgage companies created by US Congress. In most of the continental US in 2021, a conforming loan must not exceed $548,250.

What is a conventional loan?

A conventional loan is a much broader category, referring to any mortgage not offered or secured by a government body such as the Federal Housing Administration (FHA) or the US Department of Veteran Affairs (VA), or backed by Fannie Mae or Freddie Mac. Rather, they are typically available through private lenders like banks, credit unions, and mortgage companies.

Conforming vs conventional loans

Now listen closely: while all conforming loans are conventional (that is to say, they’re offered through private lenders), not all conventional loans qualify as conforming. A loan of $900,000, for instance, is conventional—because the size of a loan doesn’t affect whether a mortgage is conventional—but it does not conform because the amount of the loan surpasses the amount that makes it eligible to be backed by Fannie Mae or Freddie Mac. Instead of conforming, this would be considered a jumbo mortgage. So, size-wise, a conventional loan can either be conforming or jumbo. Because of the larger amount being borrowed, jumbo loans usually have stricter eligibility criteria.

Conforming vs conventional: eligibility considerations

For would-be homebuyers, conforming loans are desirable due to their low interest rates. For example, for first-time homebuyers taking out an FHA loan, the down payment can be as low as 3%. To qualify for a conforming loan, you’ll generally need a credit score of at least 620, and a debt-to-income ratio under 50%. While conventional loans tend to cost less than government-backed conforming ones, they can be more challenging to acquire because lenders aren’t getting additional protections from the federal government. Because they do not receive government backing or guarantees, conventional loans can therefore be considered a bigger risk. This is why—although a credit score of 620 is generally acceptable—borrowers with credit scores of 740 or higher can make lower down payments and tend to get the best conventional mortgage rates. 

Bottom line: when determining what type of loan application best suits your needs, your first step is determining the size of your loan. From there, if you require further guidance, talking to a qualified mortgage broker just may be the ticket to successfully landing the right mortgage for you.

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