Conventional vs. Conforming Loans: What You Need to Know

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Understanding Conventional and Conforming Loans

If you’re exploring mortgage options, you might encounter the terms “conventional loan” and “conforming loan.” Understanding the difference between these two can help you make an informed decision. At O1ne Mortgage, we are here to guide you through every step of the process. Call us at 213-732-3074 for any mortgage service needs.

What Is a Conventional Loan?

A conventional loan is a mortgage that is not backed by the federal government. These loans are issued by private lenders or financial institutions and are not guaranteed by 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 the flexibility to set their own lending criteria, including income and credit score requirements, as well as interest rates and fees.

What Is a Conforming Loan?

A conforming loan is a type of conventional mortgage that meets the eligibility criteria for purchase by Fannie Mae and Freddie Mac. These federally chartered corporations buy most of the mortgage contracts issued in the U.S., ensuring that lenders have funds available to lend. The Federal Housing Finance Agency (FHFA) sets the criteria for these loans annually.

For 2023, the criteria include:

• A minimum FICO® Score of 620
• Loan amounts that do not exceed the conforming loan limit (CLL) for the county
• A minimum down payment of 3% of the purchase price
• A maximum debt-to-income ratio (DTI) of 45%

Non-Conforming Conventional Loans

For borrowers who need loans outside the conforming loan limits, non-conforming conventional loans are available. These include:

Jumbo Loans

Jumbo loans are used to purchase homes with market prices that exceed the loan limit for their location. These loans often have higher credit score and income requirements and may come with higher interest rates.

Interest-Only Mortgages

Interest-only mortgages allow you to make lower payments that only cover interest for a fixed period. After this period, you must make higher payments that cover both interest and principal. These loans are rare and usually come with adjustable interest rates.

What Type of Mortgage Loan Is Best?

When choosing a mortgage, consider all available options:

Conforming Conventional Loan

This option is ideal if:

• Your home price is at or below the conforming loan limit
• You have strong credit and adequate income
• You can make a substantial down payment

Government-Backed Loan

If you qualify for an FHA, VA, or USDA loan, you might benefit from lower down payments and credit score requirements. However, these loans may have higher fees and interest rates over the loan’s life.

Jumbo Loan

If your home price exceeds 115% of the median home price in your area, consider a jumbo mortgage.

The Bottom Line

Before applying for a mortgage, review your credit reports and check your credit score. Knowing where you stand can help you improve your credit profile if needed. At O1ne Mortgage, we are committed to helping you find the best mortgage option. Call us at 213-732-3074 for personalized assistance.

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