Conforming Loans vs. Conventional Loans in Real Estate
While studying for your real estate exam you may have heard the terms "conforming loan" and "conventional loan." What do these mean? A conforming loan is a mortgage that meets the specific criteria set by Fannie Mae and Freddie Mac.
Conventional loans are all mortgages that are not conforming. These two government-sponsored entities purchase mortgages in order to provide liquidity in the housing market.
What is a conforming loan?
Conforming loans are those that meet the guidelines set forth by Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) purchase mortgages in order to provide liquidity in the housing market.
The main criteria for a conforming loan are the size of the loan. Conforming loans must be less than government set numbers each year. You should check the current years' amount before you take your real estate exam.
They can be for any term and have a variety of interest rates. You may hear them referred to as "Conventional Conforming" or "Agency Conforming" loans.
What are the benefits of a conforming loan?
- You can get a lower interest rate because Conforming loans are backed by Fannie Mae or Freddie Mac.
- Conforming loans have guidelines that are less strict than other types of loans, so it may be easier to qualify.
- Conventional loans typically have higher interest rates than Conforming loans.
- Conventional loans are not backed by a government entity, so they may be harder to qualify for.
What is a conventional loan?
A conventional loan is any mortgage that does not meet the guidelines set forth by Fannie Mae and Freddie Mac. Conventional loans can be for any term and have a variety of interest rates.
You may hear them referred to as "non-conforming" or "jumbo" loans. Jumbo loans are those that exceed the limit set by Fannie Mae and Freddie Mac for any given year.
What are the benefits of a conventional loan?
- You can put down a lower down payment, sometimes as low as 0%.
- Nonconforming loans have higher loan limits. This is important if you need a jumbo loan.
- Nonconforming loans give access to a wider variety of properties for purchase.
- Easier to get for people with certain negative marks on their credit report.
What's the difference between a conforming and conventional Loan?
The biggest difference between Conforming and Conventional loans is the way they are backed. Conforming loans are backed by Fannie Mae or Freddie Mac.
If a loan meets their guidelines, the GSEs (government sponsored enterprises) will purchase the loan. This gives lenders liquidity in the marketplace to make more loans.
Conventional loans are not backed by a GSE. Lenders assume all the risks when making these loans and do not have the same guidelines as Conventional loans.
Conforming and Conventional loans are similar, but the main difference is how they are backed. Conforming loans are backed by Fannie Mae or Freddie Mac. Conventional loans are not backed by a GSE. Lenders assume all the risks when making these loans and do not have the same guidelines as Conforming loans.
When choosing a loan, you should understand the difference and choose the one that is right for you.
On your real estate exam, you will surely see several questions that require you to know the difference between a conforming loan and a conventional loan. Be sure to understand this concept.
If you want to see some examples of questions that will be on the actual real estate exam, check out our free real estate practice exam. We have been named as the best real estate exam practice for 7 years in a row!
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