A conventional loan is an umbrella term for any loan not backed by a governmental agency. They are the most commonly used type of home loans and exclude programs such as FHA and VA loans. Conventional loans break down into two categories: conforming and non-conforming.
Let’s take a look at these two mortgage options, what makes them different and what you need to know when shopping for a mortgage.
The Difference Between Conforming And Non-Conforming Mortgages
Conforming loans are loans that meet the limits determined by Fannie Mae or Freddie Mac. These are government-sponsored enterprises (GSEs) that help regulate mortgage lending. When it comes to choosing a mortgage, conforming loans offer several benefits.
For example, interest rates on a conforming loan are very competitive compared to both government-back and non-conforming loans. That’s partly because these loans can be sold to Fannie Mae or Freddie Mac, offloading the risk from a lender’s portfolio.
In addition, conforming loans are given certain governmental protections since so many of these loans are held by the two GSEs. These protections can include foreclosure moratoriums or anti-predatory practices.
Non-conforming loans come with their own benefits, which include flexibility. Because they’re not beholden to GSE regulations, lenders can offer unique loan products that meet the needs of non-traditional buyers. This can include the need for financing beyond conforming loan limits.
Jumbo loans are an example of this and offer financing for homebuyers who want to purchase high-value homes. In a tight housing market, offering extra cash can mean the difference between being a homeowner and a home shopper.
Rate Options For Conventional Loans
When shopping for a conventional loan, your lender can provide options to tailor the mortgage to meet your needs.
Fixed-Rate Mortgages: A fixed-rate mortgage charges a set interest rate that does not change over the life of the loan. The main advantage of a fixed-rate loan is that you’re protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise.
Adjustable-Rate Mortgages: The interest rate for an adjustable-rate mortgage is variable. The initial rate is generally a bit below the market rate and can last for several years, but that rate can rise after the set period ends. The main advantage of an ARM is that it is considerably cheaper than a fixed-rate mortgage, at least for the initial period. The low initial payments may allow the borrower to qualify for a larger loan.
Conventional Loan Products
There are also many loans you can consider that fall under a conventional loan.
Jumbo lending: As mentioned, this is a non-conforming loan for higher-priced homes, second homes or investment properties. Some jumbo products provide up to 90% financing, loan amounts as high as $5 Million and credit scores requirements as low as 680.
Fannie Mae HomeReady®: A fixed-rate affordable housing program for creditworthy borrowers with up to 97% financing. Cash for down payment or closing costs can come from multiple sources, including gifts or grants, with no minimum personal funds required.1
Freddie Mac Home Possible®: Offers up to 97% financing and other credit flexibilities for low-to-moderate-income borrowers. Down payment can come from various sources, including family, employer-assistance programs, secondary financing and sweat equity.
Bank Statement loans: Another non-conforming loan that allows you to get a mortgage without the W2s and tax returns that most loans need to prove your income. They work great for self-employed borrowers because they look at bank statements to evaluate eligibility.
When you’re to begin your homebuying journey and would like to learn what loan products make sense for you, don’t hesitate to contact us! We’re here to help!
HomeReady® is a registered trademark of Fannie Mae.
1Income must meet 100% of the area median income (AMI) limits for the property location.