There is a lot of terminology used in real estate that is foreign to most first-time home buyers.
It is important to know the lingo when you are buying a house. If you do, your real estate agent will take you more seriously.
What is a Conventional Mortgage?
A conventional mortgage is a home loan that does not take advantage of any government mortgage programs. The most common mortgage programs are FHA Loans, VA Loans, and USDA Loans.
A Conventional mortgage does not use any of those.
What is a Conforming Mortgage?
The term “conventional mortgage” is some times confused with “conforming mortgage.”
A conforming mortgage is a conventional mortgage that meets the guidelines established by Fannie Mae and Freddie Mac.
The Fannie Mae and Freddie Mac requirements include minimum credit score, minimum down payment, and maximum loan limits.
View nationwide conforming loan limits.
Most conventional mortgages are “conforming” but not all.
What is a Jumbo Loan?
Typically it is much easier to get a mortgage that conforms to the requirements set by Fannie Mae and Freddie Mac. However, it is not impossible.
Loans that exceed the conforming loan limits are called Jumbo Loans. You can get a jumbo loan, but you will need a higher credit score, larger down payment, and higher income.
If you do not have a high enough credit score or down payment to get a conforming mortgage, there are government programs that can help.
What is an FHA Loan?
An FHA Loan is a mortgage program designed to help Americans become home owners.
A conventional mortgage requires a 20% down payment and a credit score of 610+.
An FHA mortgage only requires 3.5% down and a minimum credit score of 580+.
FHA stands for Federal Housing Administration. With an FHA Loan, the FHA agrees to insure your mortgage in case of default.
This means that if you are unable to pay your mortgage, the FHA will pay back the bank so they don’t lose money.
If you default on an FHA Loan you will still lose the house. But from the banks perspective, and FHA Loan is safer.
Because the bank is protected, they are willing to give riskier loans to people with lower credit scores or smaller down payments.
That sounds great. What’s the catch?
Disadvantages of FHA Loans
FHA Loans are great for some people. But there are disadvantages too.
Cost of an FHA Loan
FHA Loans have mortgage insurance. Like all insurance, you have to pay for that insurance. These payments are called Mortgage Insurance Premiums or MIPs.
MIPs ranges from 0.45% to 1.05% per year depending on your loan amount and down payment.
The good news is that once you have paid on your mortgage for a few years you can usually qualify to refinance into a conventional mortgage without mortgage insurance. This will save you a lot of money on Mortgage Insurance Premiums.
FHA Loans are Slow
FHA Loans take longer to secure and require a lot more paper work than a conventional mortgage.
If a seller receives two similar offers, they may choose to go with the conventional mortgage offer because it will close faster than an FHA mortgage offer.
Conclusion
There are a lot of options when it comes to financing a home. Conventional mortgages are most common. Most conventional mortgages are considered “conforming” which means they meet the requirements set by Fannie Mae and Freddie Mac.
If a loan exceeds the conforming loan limits then it is called a jumbo loan.
If a loan is below the FHA loan limits but the home buyer does not have a big enough down payment or a high enough credit score then an FHA Loan is a good option.
An FHA loan is a government program designed to help more Americans become home owners.
If you qualify, there are other loan programs that can help, such as VA Loans or USDA Loans.
Arthur Williams
Arthur has been in real estate for over 15 years. He started his career as a real estate agent and then started investing himself. Arthur has experience navigating many different financing options, multi-family and single-family rentals, commercial real estate, and restoration projects.
February 20, 2020 (Updated June 23, 2022)