A conventional loan is any mortgage that does not conform to a government-backed program such as FHA, VA, or USDA. Conventional loans typically have higher interest rates than government-backed loans, but they are also not restricted to low-income borrowers.
Conventional loans may require a larger down payment, typically ranging from 5 to 20 percent of the purchase price. They also often require private mortgage insurance, or PMI, if the borrower puts down less than 20 percent. The amount of PMI required depends on the size of the down payment, the amount of the loan, and the creditworthiness of the borrower.
Non-conforming loans, also known as jumbo loans, exceed the maximum loan limits established by Fannie Mae and Freddie Mac. They tend to have stricter underwriting requirements and higher interest rates than conventional loans. Non-conforming loans are used to finance properties that are not eligible for other mortgage programs, such as luxury homes in high-cost areas.
Finally, conforming loans conform to the guidelines set forth by Fannie Mae and Freddie Mac. These loans usually have lower interest rates and can be easier to qualify for than non-conforming loans. However, conforming loans may have a maximum loan limit based on the location of the property.
In summary, understanding the differences between conventional, non-conforming, and conforming loans is an essential part of the home-buying process. Conventional loans are mortgage loans that do not conform to a government-backed program and typically have higher interest rates and require a larger down payment. Non-conforming loans, also known as jumbo loans, exceed the maximum loan limits established by Fannie Mae and Freddie Mac and tend to have stricter underwriting requirements and higher interest rates. Lastly, conforming loans conform to the guidelines set forth by Fannie Mae and Freddie Mac and usually have lower interest rates and can be easier to qualify for. It is important to know these distinctions when shopping for a mortgage loan, as the type of loan you choose will have a major impact on your financial future.
This article was contributed on Nov 08, 2023
