Conforming, Conventional and Government Loans

conformingThe most confusing world for homebuyers has to be mortgage loans. If you don’t know the difference between “conforming,” “conventional” and “government” loans, here’s a quick tutorial of what you should know, so you’ll have a better idea what kind of loan you want and you can get preapproved to buy the home you want.

First of all, the USA doesn’t lend money to homebuyers, so there really is no such thing as a government loan. But, through federal agencies such as the Federal Housing Authority and the Veteran’s Administration, there is a guarantee that banks that offer mortgages won’t lose their money should the loans go into default.

FHA and VA loans allow first-time or low-income borrowers to buy a home with little or no down payment and with less than perfect credit scores. To protect taxpayers from losses, the loans are guaranteed through mortgage insurance that borrowers pay for the life of the loans.

Conforming loans refer to loans that conform to borrowing limits, depending on the cost of living for the area. Loans that are above the given amount are called non-conforming or jumbo loans.

While it may seem counterintuitive, a conventional mortgage is simply any loan that is not guaranteed by the federal government. Conventional loans conform to borrowing guidelines set by the government-sponsored entities Fannie Mae and Freddie Mac which buy loans packaged into securities from mortgage lenders. To minimize risk for investors, Fannie and Freddie insist that the borrower and bank must “conform” to their terms and amounts.

Talk to your mortgage lender to learn which loans would be right for you.

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