Conforming vs. Conventional

Attribute	Conforming	Conventional
Definition	Following established rules or standards	Following traditional or common practices
Behavior	Adhering to regulations or guidelines	Following societal norms or customs
Acceptance	Generally approved or supported	Generally recognized or expected
Flexibility	Less room for individuality or creativity	May allow for more personal expression

Definition

Conforming and conventional are two terms often used in the context of loans, specifically mortgages. Conforming loans are those that meet the guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac. These guidelines typically include loan limits, credit score requirements, and debt-to-income ratios. On the other hand, conventional loans are not guaranteed or insured by the government and are not subject to the same strict guidelines as conforming loans.

Loan Limits

One of the key differences between conforming and conventional loans is the loan limits. Conforming loans have a maximum loan amount that can vary depending on the location of the property. In most areas, the limit is set at $548,250 for a single-family home in 2021. On the other hand, conventional loans do not have a set maximum loan amount, but lenders typically have their own limits based on the borrower's creditworthiness and financial situation.

Down Payment Requirements

Another important distinction between conforming and conventional loans is the down payment requirements. Conforming loans often have lower down payment requirements compared to conventional loans. For example, some conforming loans may only require a down payment of 3% of the purchase price, while conventional loans typically require a down payment of at least 5% to 20%, depending on the lender and the borrower's credit score.

Interest Rates

Interest rates can also vary between conforming and conventional loans. Conforming loans may have slightly lower interest rates compared to conventional loans because they are considered less risky for lenders. This is due to the fact that conforming loans adhere to strict guidelines set by government-sponsored entities, making them more attractive to investors. On the other hand, conventional loans may have higher interest rates to compensate for the increased risk associated with these loans.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is often required for borrowers who make a down payment of less than 20% on a conventional loan. This insurance protects the lender in case the borrower defaults on the loan. Conforming loans, on the other hand, may also require PMI if the down payment is less than 20%, but the guidelines for PMI can vary depending on the lender and the loan program.

Qualification Requirements

Qualification requirements for conforming and conventional loans can also differ. Conforming loans typically have stricter qualification requirements, including higher credit score requirements and lower debt-to-income ratios. This is because conforming loans are backed by government-sponsored entities, making them less risky for lenders. Conventional loans, on the other hand, may have more flexible qualification requirements, allowing borrowers with lower credit scores or higher debt-to-income ratios to qualify for a loan.

Loan Processing Time

The processing time for conforming and conventional loans can vary as well. Conforming loans may have a faster processing time compared to conventional loans because they adhere to strict guidelines set by government-sponsored entities. This can make the approval process quicker and more streamlined for borrowers. On the other hand, conventional loans may take longer to process due to the additional documentation and verification required by lenders.

Flexibility

When it comes to flexibility, conventional loans offer more options for borrowers compared to conforming loans. Conventional loans can be used for a wider range of property types, including investment properties and second homes. Additionally, borrowers may have more flexibility in terms of loan terms and repayment options with conventional loans. Conforming loans, on the other hand, are more rigid in terms of guidelines and may not offer as much flexibility for borrowers.

Conclusion

In conclusion, while both conforming and conventional loans have their own set of attributes, it is important for borrowers to carefully consider their financial situation and goals when choosing between the two. Conforming loans may be a good option for borrowers who meet the strict guidelines set by government-sponsored entities and are looking for lower interest rates and down payment requirements. On the other hand, conventional loans may be a better choice for borrowers who need more flexibility in terms of loan options and qualification requirements. Ultimately, the decision between conforming and conventional loans will depend on the individual borrower's needs and circumstances.