Mortgage loans can be confusing. The terminology alone can leave first-time home buyers and mortgage shoppers scratching their heads.
For example, take the whole conforming and conventional loan thing. What do these labels mean? Is a conforming loan the same as conventional? Or are they different? Here’s what you need to know!
At a glance: a conventional mortgage loan is one that is not guaranteed or insured by the a government agency. Depending on their size, conventional loans can either be conforming or jumbo.
Understanding Conforming and Conventional Loans
This topic will make a lot more sense if we start with a couple of basic definitions:
- A conventional loan is one that is not guaranteed or insured by any government agency. This sets them apart from FHA and VA mortgage loans, which are insured by the government. So in this context, the term “conventional” basically means a normal or regular loan that does not receive government backing.
- A conforming loan is a conventional mortgage product that meets or “conforms” to certain size limits and other parameters. Details below.
These days, most conventional mortgage loans eventually get “bundled” or packaged and sold to investors through what is known as the secondary mortgage market. The two biggest loan buyers are Freddie Mac and Fannie Mae, the so-called government-sponsored enterprises (or GSE’s) that purchase mortgages sold by lenders.
As shown in the image above, the term “conventional” mortgage is used to differentiate these loans from those programs that do receive some form of government backing. Government-backed loans include the FHA, VA and USDA mortgage programs.
Conventional Loans: Often Cheaper But Harder to Get
According to the Consumer Financial Protection Agency: “Conventional loans typically cost less than FHA but can be more difficult to get.”
The reason why conventional loans are sometimes harder to obtain is that they do not receive government backing or guarantees. That means they can be a bigger risk to the lender and/or investor.
With an FHA or VA loan, on the other hand, the lender receives an added layer of protection via the federal government. That is why those government loan programs are often easier to qualify for.
So that covers the basic definition of a conventional home loan. It is one that does not receive a government guarantee, insurance or backing. But what about a conforming loan? Is it the same as conventional? Let’s take a closer look.
What Does it Mean to ‘Conform’?
A conforming loan is one that meets certain pre-established criteria used by Freddie Mac and Fannie Mae. The most important of these criteria is the size or amount of the loan.
When a borrower uses a mortgage that falls within the loan limits for his or her county, it is referred to as a conforming loan. It can therefore be sold to Fannie Mae or Freddie Mac via the secondary mortgage market.
When a conventional home loan exceeds the conforming limits for the county where the home is being purchased, it is referred to as a jumbo loan. This means it does not meet the conforming standards used by Fannie and Freddie, and therefore cannot be sold to either of those entities.
Because of the larger amount being borrowed, jumbo loans are typically more strict in terms of borrower eligibility criteria. Generally speaking, borrowers need better credit and a larger down payment in order to qualify for a jumbo mortgage product.
So, from a size perspective, a conventional loan can either be conforming or jumbo. If it falls within the parameters used by Freddie Mac and Fannie Mae (and can therefore be purchased by those GSE’s), it is considered to be a conventional conforming loan.
On the other hand, if it exceeds the size limits or other parameters used by Freddie and Fannie, it is referred to as a jumbo loan.
Summary of Key Points
We’ve covered a lot of terminology and concepts so far in this article. Here’s a quick recap of the key points:
- A conventional loan is one that is not insured or guaranteed by a government agency (such as the Federal Housing Administration or the Department of Veterans Affairs).
- The FHA, VA and USDA mortgage programs are not conventional loans because they do receive backing from the federal government.
- Depending on its size, a conventional loan can either be conforming or jumbo.
- “Conforming” means that it falls within the size limits for the county where the home is being purchased.
- To qualify for a jumbo loan, borrowers generally need to have sufficient income, a solid credit history, and sometimes a larger down payment (compared to those who use smaller conforming loans).
This article answers a common question among mortgage borrowers: Is a conforming loan the same as conventional? If you would like to learn more about this and related topics, check out the article list to the right or use the main menu above.