If you are planning to buy a new home or refinance your current mortgage, you might have come across the term conventional loan. In a nutshell, a conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the lender assumes the risk of the loan and is responsible for determining the borrower's eligibility and underwriting the loan.
There are three primary types of conventional loans: conforming, non-conforming, and jumbo loans. Here's what you need to know about each:
A conforming loan is a conventional loan that meets the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell mortgage loans. Specifically, a conforming loan must meet the following criteria:
One of the advantages of a conforming loan is that it usually comes with a lower interest rate compared to other conventional loans. This is because conforming loans are considered less risky for lenders, given their compliance with Fannie and Freddie standards.
A non-conforming loan, also known as a jumbo loan, is a conventional loan that exceeds the limits set by Fannie and Freddie. In other words, it is a loan that is too large to be sold to these entities. Non-conforming loans may have higher interest rates and stricter qualifying requirements than conforming loans.
Here are some of the criteria for a non-conforming loan:
A jumbo loan is a type of non-conforming loan that is specifically for amounts greater than the conforming loan limits. Jumbo loans typically have stricter qualifying requirements and higher interest rates, as they are considered riskier for lenders.
Some of the criteria for a jumbo loan include:
Choosing the right type of mortgage loan depends on your financial situation, creditworthiness, and borrowing needs. If you are in the market for a mortgage, it is essential to understand the different types of conventional loans available.
If you have a great credit score and are purchasing an expensive home, a jumbo loan may be the best fit for you. If you are looking for a more affordable loan, a conforming loan could be the way to go. Finally, if you need a loan that falls outside the conforming loan limits, a non-conforming loan may be a viable option.
Remember, it's always best to speak with a qualified mortgage professional who can help you navigate the complex world of mortgage financing and guide you in choosing the best option for your needs.