If you’re planning to purchase a new home, you may hear terms like “conforming,” noncomforming,” or “conventional” when loan officers talk about mortgage options. These terms may leave you scratching your head, so we’ve put together a quick guide on conforming loans vs. conventional loans to help you better understand your options. Here’s what you need to know.
What is a conforming loan?
A conforming loan is a type of conventional lending product that meets the home loan limits established by the Federal Housing Finance Agency, Freddie Mac, and Fannie Mae. In 2021, the national home price average increased. As a result, so did the 2022 average home loan limits for government-sponsored enterprise (GSE) loans. The previous home loan limit was $548,250; however, in 2022, it rose to $647,200—an 18% increase. Some high-cost areas top out at $970,800.
Conforming loans are ones lenders can easily sell to one of the GSEs. This means less risk to your lender should you default on your loan. It also allows lenders to offer you additional perks:
- More lenient qualifying criteria
- Lower interest rates
- Lower monthly payments
To qualify for a conforming loan, you must have a minimum credit score of 620. If you have excellent credit, your lender may offer a lower interest rate.
What is a conventional loan?
All conforming loans are conventional loans. However, not all conventional loans are conforming loans.
There are two conventional lending options—conforming and nonconforming. A nonconforming loan doesn’t qualify for backing by a government agency, such as the Federal Housing Administration, U.S. Department of Veterans Affairs, or a GSE like Fannie Mae or Freddie Mac. This can increase the risk for private lenders, such as banks, credit unions, and mortgage companies, because they assume all the risk should you default on your loan. As a result, nonconforming loans will often feature stricter conventional home loan requirements, higher interest rates, and higher monthly payments.
The same is true for larger loans called jumbo loans, but there are additional differences when you compare a jumbo loan versus conventional loan.
However, if you borrow within the parameters of a conforming loan, private lenders can sell the loan and its risks to Freddie Mac or Fannie Mae. Conforming mortgages also offer fixed interest rates ensuring your rates will not increase over time.
Qualifying for a conforming loan vs. conventional loan
No matter which option you choose, your lender will evaluate certain financial criteria:
- Proof of income
- Employment verification
- Credit score and history
- Debt-to-income ratio
- Your mortgage’s loan-to-value (LTV) ratio
- Proof of your current assets, such as checking, savings, and investment accounts
Based on your financial information, lenders will determine if you can comfortably meet your monthly mortgage payments, which shouldn’t exceed 28% of your gross income.
You will also need to provide a down payment, which can range from 3% to 20%. And don’t forget to ask your lender about additional expenses, such as application fees, closing costs, mortgage insurance, and homeowners insurance.
If you have any additional questions about conforming loans vs. conventional loans, our OVM Financial professionals can help.
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