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Understanding Conventional and Conforming Loans with O1ne Mortgage

When exploring mortgage options, you might encounter the terms “conventional loan” and “conforming loan.” Understanding these can help you make an informed decision. At O1ne Mortgage, we are here to guide you through the process. Call us at 213-732-3074 for any mortgage-related needs.

What Is a Conventional Loan?

A conventional loan is a mortgage not backed by the federal government. These loans are issued by private lenders or financial institutions and are not guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or 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 the flexibility to set their own lending criteria, interest rates, and fees within federal guidelines, 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. These federally chartered corporations buy most mortgage contracts in the U.S., ensuring that lenders have funds available to lend. The Federal Housing Finance Agency (FHFA) sets the criteria for these loans annually.

For 2023, the criteria include:

• A minimum FICO® Score of 620.
• Loan amounts must not exceed the conforming loan limit (CLL) for the county. For most of the U.S., the CLL is $726,000, but it can go up to $1,089,300 in high-cost areas.
• A minimum down payment of 3%, with private mortgage insurance (PMI) required if the down payment is less than 20%.
• A maximum debt-to-income ratio (DTI) of 45%, or up to 50% with higher down payments and/or a higher FICO® Score.

Non-Conforming Conventional Loans

For borrowers needing loans outside conforming limits, non-conforming conventional loans are available, including:

• Jumbo loans: For homes priced above the conforming loan limit. These loans often have stricter credit and income requirements and may come with higher interest rates.
• Interest-only mortgages: Initially, payments cover only interest, switching to higher payments covering both interest and principal after a set period. These loans are rare and typically have adjustable interest rates.

What Type of Mortgage Loan Is Best?

Choosing the best mortgage type depends on your specific situation:

• Conforming conventional loan: Ideal if you have strong credit, adequate income, moderate debt, and can make a substantial down payment.
• Government-backed loan: Suitable if you qualify for FHA, VA, or USDA loans, offering low down payments and credit score requirements but potentially higher fees and interest rates.
• Jumbo loan: Necessary if you’re purchasing a home priced above 115% of the median home price in your area.

The Bottom Line

Before applying for a mortgage, review your credit reports and check your credit score to understand how lenders will view your application. You can check your FICO® Score from Experian for free. If needed, take steps to improve your credit profile before applying.

For personalized assistance and to explore your mortgage options, contact O1ne Mortgage at 213-732-3074. We’re here to help you find the best mortgage solution for your needs.

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