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Understanding Conventional and Conforming Loans: Which Mortgage Option is Best for You?

When you’re exploring mortgage options, you might come across terms like “conventional loan” and “conforming loan.” Understanding these terms and how they relate to each other can help you make an informed decision about which mortgage is best for you. At O1ne Mortgage, we are here to guide you through the process and help you find the perfect loan for your needs. 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. This means it is issued by private lenders or financial institutions without guarantees from government agencies like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture (USDA). According to the U.S. Census Bureau, about 75% of home purchases in the U.S. are financed through conventional loans.

Private lenders have significant freedom to set their own lending criteria, interest rates, and fees for conventional loans. This flexibility allows them to tailor loans to meet the needs of different borrowers based on factors such as income and credit score.

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, the federally chartered corporations that buy the majority of mortgage contracts in the U.S. These criteria are set annually by the Federal Housing Finance Agency (FHFA) and include:

• A minimum FICO® Score of 620
• Loan amounts that do not exceed the conforming loan limit (CLL) for the county where the property is located
• A minimum down payment of 3% of the purchase price
• A maximum debt-to-income ratio (DTI) of 45% (or up to 50% with higher down payments and/or a higher FICO® Score)

For 2023, the CLL for a single-family home in most of the country is $726,000, but it can be as high as $1,089,300 in counties with the highest median home costs.

Non-Conforming Conventional Loans

Not all conventional loans meet the criteria for conforming loans. Some borrowers need loans that fall outside these limits, and a variety of non-conforming conventional loans are available, including:

Jumbo Loans

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

Interest-Only Mortgages

Interest-only mortgages allow borrowers to make lower payments that only cover interest for a fixed period. After this period, payments increase to cover both interest and principal. These loans often have strict lending requirements and higher, adjustable interest rates.

What Type of Mortgage Loan Is Best?

Choosing the best mortgage type depends on your individual circumstances. Here are some considerations:

Conforming Conventional Loan

This option is likely the best if:

• You are shopping for a home priced at or below the conforming loan limit for your area
• You have strong credit, adequate income, and moderate (or less) debt
• You can afford a substantial down payment

Government-Backed Loan

If you meet the criteria 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 life of the loan.

Jumbo Loan

If you are looking to purchase a home that exceeds 115% of the median home price in your area, a jumbo loan might be your best option.

The Bottom Line

Before applying for a mortgage, it’s essential to review your credit reports and check your credit score. This will help you understand how lenders view your application and allow you to improve your credit profile if necessary. At O1ne Mortgage, we are committed to helping you find the best mortgage option for your needs. Contact us today at 213-732-3074 to get started on your home-buying journey.

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