Conforming Vs. Conventional Mortgage

by William Pirraglia, Demand Media

    People often confuse conforming and conventional mortgages, thinking the terms are interchangeable. If you're in this category, fear not. You'll be knowledgeable in a moment. Conventional mortgages are all loans that are not made or guaranteed by the U.S. government. Conforming mortgages are those eligible for purchase by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Therefore, some -- but not all -- conforming mortgages are also conventional loans.

    Conventional Mortgages

    These loans include Fannie Mae, Freddie Mac, and all other mortgages from banks, credit unions, and mortgage companies, including jumbo loans -- for the most expensive homes with balances above conforming limits, currently at $417,000. Sub-prime mortgages, for B-, C-, and D-credit borrowers are also conventional loans, although they often appear to be anything but conventional. Conventional mortgages do not include those made or guaranteed by the FHA (Federal Housing Administration), the VA (Veterans Administration), or the U.S. Department of Agriculture.

    Conforming Mortgages

    Since 1971, Fannie Mae and Freddie Mac have created the standard for conforming mortgages. As founders of the "secondary market," these quasi-governmental corporations established conforming mortgage rules and qualification standards. For some years they were the secondary market, as there were no other buyers. As the secondary market expanded with more and more mortgage buyers, they adopted the qualification standards set by Fannie and Freddie. Although the conforming market has suffered during the recent recession and mortgage "bubble burst," conforming mortgages remain the most popular source of home financing.

    Government Mortgages

    FHA, VA, and Department of Agriculture (Rural Housing Service) mortgages are not conventional mortgages. The U.S. government sets their qualification parameters, rates and terms. FHA loans were the original "non-conforming" mortgages and, with the disappearance of many sub-prime loans, have returned to prominence. For those who are current or former military personnel, VA loans can be attractive alternatives to conventional mortgages, with special borrower-friendly provisions, including low interest rates and flexible qualification rules.

    Significance

    With the disappearance of many sub-prime mortgages since 2007, conforming and other conventional loans are the choice of prospective homeowners with good income and credit. For those borrowers with credit, cash or income "challenges," FHA mortgages have, once again, become the most popular choice. For example, with no minimum credit score requirements and only 3.5 percent down payments, younger home buyers can enjoy the benefits of home ownership. However, conforming and other conventional mortgages remain the most popular options for the majority of homeowners.

    About the Author

    For 34 years Bill Pirraglia served as a senior executive in the banking industry. Since 2005, he has authored articles, blog entries, tips and advice columns, SEO web copy and two published books. He specializes in personal and business finance topics, along with legal articles for clients large and small.