Conventional vs. Conforming Loans

You might have heard people talking about loans being “conventional” or “conforming,” and wondered what these words mean.

They kinda sound alike, and indeed, a lot of people use them interchangeably.  To make matters worse, they are extremely similar – but not exactly the same!

Let’s break them down…

Conventional Loans

A conventional loan is a loan that is not backed, insured, or guaranteed by the government.  In other words, the lenders are banks, credit unions, or other private lenders.

FHA, VA, and USDA loans are not conventional loans, because they are government backed loans.

Conventional loans can be fixed-rate or variable-rate in terms of their interest rate, and can have different terms, or length of time set for their payoffs.

Conforming Loans

In contrast, conforming loans meet the standards of Fannie Mae and Freddie Mac to be re-sold on the secondary mortgage market.  These conforming loans might be conventional loans as well (which is why people confuse the two so often).  This means all conforming loans are conventional – but not all conventional loans are conforming.

Conforming loans, because they have fairly strict requirements – loan amounts, loan-to-value (LTV) limits, and debt-to-income ratios – tend to have lower interest rates than non-conforming loans.

A jumbo loan is an example of a non-conforming loan.  Typically, the interest rates and down-payment requirements are higher than with conforming loans.  The cutoff limit (Conforming Loan Limit, or CLL) that defines a jumbo loan is set every year by the FHFA and will depend on where you live.

So what does this mean for you?

1. Your first decision is whether to go for a conventional or government-backed loan.  Often times, FHA and VA loans will offer features not available from conventional loans, such as lower down payments.
2. If you decide to go for a private lender, you will need to consider whether the price point you are considering qualifies as a conforming loan.  If it is a jumbo loan over the limit, you might want to consider putting up a larger down payment to bring the loan underneath the cutoff limit, or perhaps consider a less-expensive property.
3. Once you’ve chosen your loan and gotten pre-approved, time to go find your dream home!