Conforming Vs. Conventional Mortgage

When you’re ready to put down roots and buy a home, you can feel overwhelmed by the different terms used for different types of mortgages. The short distinction between conventional mortgages and conforming mortgages is that a conventional mortgage isn’t backed by any government agency, whereas a conforming mortgage must meet the criteria for the mortgage to be purchased by a government-sponsored entity like Freddie Mac or Fannie Mae. Understanding the differences between these types of mortgages and the implications for getting approved for a mortgage of your own can save you a lot of money.

A conventional mortgage doesn’t have a maximum loan amount to which you’re limited. That doesn’t mean that you’ll be approved for a $1 million mortgage, though; it means that if you meet the bank’s criteria, the bank doesn’t need to use any government restrictions on the size of the mortgage.

If you are applying for a conforming mortgage, however, your mortgage can’t exceed the federal limits for Fannie Mae or Freddie Mac to purchase the mortgage from the lender after it is issued. For most areas, that means you can’t borrow more than $484,350, or $726,525 in certain high-cost areas. The limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands are higher.

Especially when borrowers cannot make a large down payment, lenders are more hesitant to make loans without government backing. As a result, you often need to put down at least 20 percent of the purchase price on a conventional mortgage, though sometimes you can put down less and pay a higher interest rate or pay private mortgage insurance. If you can’t put down quite as much, you may need to opt for a mortgage that comes with government backing, such as one guaranteed by the Federal Housing Administration or Department of Veterans Affairs.

There is some overlap between conventional mortgages and conforming mortgages, as the two definitions are not mutually exclusive. For example, you could have a $300,000 home purchase where the borrower puts down $60,000 and takes out a $240,000 mortgage that isn’t backed by a government agency. That mortgage would be a conventional mortgage because it isn’t guaranteed by a government agency, and it would also be a conforming mortgage because the amount of the mortgage is less than the maximum loan limit for Fannie Mae or Freddie Mac to purchase it from the originating bank.