Are you planning to get your very first mortgage but are confused about all the different mortgage products out there? It helps to start by learning about the differences between conforming and nonconforming loans.

Conforming Loan

Any conforming loan is the type that is typically funded by the government through Fannie Mae and Freddie Mac, which are the names of two government-backed companies that provide the money for the loans. However, they can also be funded by individual lenders with home buyers that meet the same guidelines. This gives the lender the option to sell the mortgage to Fannie Mae and Freddie Mac in the future if they choose to. These loans typically have more strict requirements in order to get the loan, such as how much is necessary for a down payment, what your debt-to-income ratio must be, and a good credit score.

However, there is typically a loan limit for how much money you can borrow for a home with a conforming loan. This is based on the area where you live, so it will vary by the state and county that your home is located in. For example, the 2019 limit for Illinois was a $484,350 loan for a single unit property. This limit increases for multi-unit properties as well. Keep in mind that this is the loan amount and not the home's purchase price. As long as you have the money for a larger down payment to get the loan below the conforming loan limits, you are free to use a conforming loan if you qualify.

Nonconforming Loan

What makes a nonconforming loan unique is that it does not meet the guidelines to be backed by Fannie Mae and Freddie Mac. This is often due to borrowers not meeting the necessary down payment requirements. For example, a VA loan would be considered a nonconforming loan because it offers the option for no down payment. 

A nonconforming loan is often used for those more expensive homes by providing a jumbo loan and will be necessary if the amount you need to borrow is more than the conforming loan limits. A nonconforming loan is also the best option for those that have bad credit since you will have difficulty getting a conforming loan if you have recently gone through bankruptcy. 

Reach out to a local lender in your area for more information about nonconforming and conforming loan programs.