Understanding Conventional and Conforming Loans: A Comprehensive Guide
When exploring mortgage options, you may encounter terms like “conventional loan” and “conforming loan.” Understanding these terms is crucial in determining the best mortgage for your needs. At O1ne Mortgage, we are here to help you navigate these options and find the perfect loan for your situation. Call us at 213-732-3074 for personalized mortgage services.
What Is a Conventional Loan?
A conventional loan is a mortgage that is not backed by the federal government. This means it is issued by private lenders or financial institutions without guarantees from federal agencies like the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture (USDA). According to U.S. Census Bureau data, about 75% of home purchases in the U.S. are financed through conventional loans.
Private lenders have significant freedom to set their own lending criteria for conventional loans, including income and credit score requirements, as well as interest rates and fees. This flexibility allows lenders to tailor loans to meet the needs of various borrowers.
What Is a Conforming Loan?
A conforming loan is a type of conventional mortgage that meets specific eligibility criteria set by Fannie Mae and Freddie Mac, the federally chartered corporations that buy most mortgage contracts in the U.S. These criteria ensure that banks, credit unions, and other lenders have funds available to lend by converting existing mortgage contracts into mortgage-backed securities (MBS), which are traded on public exchanges.
Each year, the Federal Housing Finance Agency (FHFA) publishes criteria that mortgage loans must meet to be purchased by Fannie Mae or Freddie Mac. For 2023, these criteria include:
- A minimum FICO® Score of 620.
- Loan amounts that do not exceed the conforming loan limit (CLL) for the county where the property is located. For 2023, the CLL for a single-family home in most of the country is $726,000, but it can be as high as $1,089,300 in areas with the highest median home costs.
- A minimum down payment of 3% of the purchase price, with private mortgage insurance (PMI) required if the down payment is less than 20%.
- A maximum debt-to-income ratio (DTI) of 45%, or up to 50% with higher down payments and/or a higher FICO® Score.
Non-Conforming Conventional Loans
For borrowers who need loans that fall outside conforming loan limits, several non-conforming conventional loan options are available, including:
Jumbo Loans
A jumbo loan is used to purchase a home with a market price that exceeds the conforming loan limit for its location. Lenders typically impose higher credit score and income requirements for these loans and may charge higher interest rates compared to conforming loans.
Interest-Only Mortgages
With an interest-only mortgage, you make relatively low payments that only cover interest for a fixed number of years. After this period, you must switch to higher payments that cover both interest and principal. These loans are rare and often come with higher interest rates that can be adjustable and unpredictable.
What Type of Mortgage Loan Is Best?
When deciding which mortgage type is best for you, consider the full range of opportunities available:
Conforming Conventional Loan
This option offers the greatest range of choices if:
- You are shopping for a home priced at or below the conforming loan limit for your area.
- You have strong credit, adequate income, and moderate or less debt.
- You can afford a substantial down payment.
Government-Backed Loan
If you meet the criteria for an FHA, VA, or USDA loan, you may be able to purchase a home with a relatively low down payment and credit score. However, these loans may have fees and interest rates that could cost more over the life of the loan compared to a conventional mortgage.
Jumbo Loan
If you are looking for a home that exceeds 115% of the median home price in your area, you likely will not qualify for a conforming loan and should consider jumbo mortgage options.
The Bottom Line
Before seeking a mortgage, it’s wise to review your credit reports and check your credit score to understand how favorably lenders will view your application. You can check your FICO® Score from Experian for free to know where you stand. If necessary, take time to improve your credit profile before applying for a mortgage.
At O1ne Mortgage, we are dedicated to helping you find the best mortgage option for your needs. Whether you are considering a conventional, conforming, or non-conforming loan, our team of experts is here to guide you through the process. Call us today at 213-732-3074 for personalized mortgage services and let us help you achieve your homeownership dreams.
