A reader wrote: “I’m confused by the whole FHA and conventional mortgage thing. Is an FHA loan considered a conventional loan, and is that the same thing as conforming?”
FHA, conventional, conforming. The lingo can be confusing to those who aren’t familiar with this program. But don’t worry. We’ll help you make sense of it all.
Short answer: A conventional home loan is one that is not insured or guaranteed by the government. This makes it different from an FHA loan, which does get insured by the federal government. The word “conforming” primarily relates to the size of the loan, and it’s typically used to describe a conventional mortgage product. A conforming loan is one that adheres to the size limits used by Freddie Mac and Fannie Mae, the two U.S. corporations that purchase mortgage loans.
So no, an FHA loan is not the same as conventional. They are two different things. And the word “conforming” is usually applied to conventional home loans below a certain size limit, indicating that they can be sold to Fannie and Freddie.
FHA Loans Are Not Conventional
Let’s move on to some definitions for FHA, conventional and conforming loans.
Conventional: As mentioned above, a conventional mortgage loan is one that is not insured or guaranteed by any government agency, such as the Federal Housing Administration of the Department of Veterans Affairs. It is originated (and sometimes insured) through the private sector, without government involvement.
FHA: These loans are insured by the government through the Federal Housing Administration, which falls under the Department of Housing and Urban Development (HUD). This insurance protects the mortgage lender against financial losses resulting from borrower default, or failure to pay. The government backing also encourages lenders to make loans to people they might not otherwise approve. FHA loans allow for a down payment of 3.5%, making them popular among home buyers with limited funds.
So an FHA loan is not considered to be a conventional mortgage product. In fact, the word “conventional” is used to make this very distinction. One is insured by the government — the other is not. Two different products. Now let’s move on to the definition of a conforming loan.
Conventional Mortgage Loans Can Be Conforming or “Jumbo”
A conventional loan can either be conforming or jumbo. If it meets the size limits and other criteria needed to be sold to Fannie Mae or Freddie Mac, it is considered to be a conforming loan. However, if the amount being borrowed exceeds the conforming loan limits, it is considered a “jumbo” mortgage.
So a jumbo loan can also be called non-conforming, since it does not meet or conform to the standards used by Fannie and Freddie.
For example, the conforming loan limit for a single-family home in Denver, Colorado is $493,350, as of 2017. That’s the maximum size that can be sold to Fannie Mae or Freddie Mac. Anything above that is therefore considered a jumbo mortgage. Lenders often have higher standards for borrowers seeking a jumbo loan, due to the higher level of financing.
But again, these two terms — conforming and jumbo — are typically used to describe the size of conventional (non-FHA) loans.
Learn more: This article answers the question, is an FHA loan considered conventional or conforming? Our website offers a wealth of information relating to the Federal Housing Administration mortgage insurance program. If you have questions about using an FHA loan to buy a house, you’ll probably find the answers here. Check out our learning center for more information, or use the search tool at the top of this page.