When shopping for a new mortgage you may have heard the terms “conforming” and “non-conforming.” Here’s a simple explanation of these terms and the advantages of each type of loan.

Conforming versus non-conforming

A conforming loan is a mortgage that meets the qualifications to be purchased by either Fannie Mae or Freddie Mac. A non-conforming loan does not meet these qualifications, typically because the mortgage is backed by the government or because the loan size exceeds the limit for conforming loans. Examples include USDA loans, VA loans, FHA loans and jumbo loans.

What are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are the two government-sponsored agencies that purchase mortgages from retail banks to help financial institutions issue more loans and help keep interest rates low. Fannie Mae buys mortgages from larger banks whereas Freddie Mac works with smaller institutions.

Advantages of conforming loans

Fannie Mae and Freddie Mac set requirements to determine what is a conforming loan to lower risk. Given that conforming loans are thought to be less risky, there are several benefits to using this type of loan to purchase your home:

• Conforming loans typically qualify for lower interest rates
• Less paperwork is required during the application process
• Conforming loans are a better fit for buyers with healthy credit scores needing a mortgage amount under the loan limit for their county

Advantages of non-conforming loans

Non-conforming loans help buyers obtain financing in situations where a lender may not approve a conventional loan. Situations where a non-conforming loan is beneficial include:

• When the buyer has little or no money to put down. USDA and VA loans can be approved with zero down and FHA loans can be approved with as low as 3.5% down.
• When the buyer has issues with their credit history.
• If the mortgage amount exceeds the loan limit for the purchase location. Non-conforming loans can be issued with higher loan limits.
• Certain types of properties cannot be financed with a conforming loan.

Which loan type is right for me?

Determining which loan type is right for you depends on a range of variables including your own personal financial goals. The best way to find out whether you need a conforming or non-conforming loan is to speak with a qualified mortgage broker.

Want to see if you qualify for a lower rate? Take our FREE online pre-approval, and find out in just 60 seconds how much you could be saving!

• Secure, Fast, and Easy
• Does Not Affect Your Credit
• No Obligation