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Conventional vs. Conforming vs. Government vs. Jumbo Loans; Bias For Action

Conventional vs. Conforming vs. Gov't vs. Jumbo Loans; Bias For ActionCINNABON STORY – BIAS FOR ACTION

I heard this story on a podcast a few months back and just had to share it.

When Cinnabon first started, they could only afford to lease very small spaces that required them to place their ovens in front; as a result, passersby could easily smell the aroma when they came near the store.

When Cinnabon became more successful and rented larger spaces, they were able to move those ugly ovens to the back of their stores and… sales plummeted b/c the aroma disappeared.

SO – this is my reminder to everyone building a real estate or mortgage business to put your ovens in front!

OK – this is actually my reminder to try lots of stuff b/c you never know what might work – for reasons you never came close to anticipating.

CONVENTIONAL ≠ CONFORMING

All conforming loans are conventional, but all conventional loans are NOT conforming.

I bring this up b/c people use the terms interchangeably all the time, and it does not always make sense.

For example, sometimes an agent will ask: “If they don’t qualify for jumbo financing, can they get conventional?”

CONVENTIONAL LOAN DEFINITION

A “conventional loan” is merely any mortgage loan that is NOT government-guaranteed or insured.

So “conventional loans” include all “conforming loans” AND all “jumbo loans.”

GOVERNMENT LOAN DEFINITION

“Government loans” (or non-conventional loans) include VA and FHA loans.

VA loans are “guaranteed” by the U.S. Department of Veterans Affairs, and FHA loans are “insured” by an insurance pool (funded with mortgage insurance) that is maintained by the Federal Housing Administration.

This simply means the government will make any lender “whole” in the event of a foreclosure – where the sale of the property does not generate sufficient funds to cover the outstanding debts against the property.

CONFORMING LOAN DEFINITION

A conforming loan is a loan that “conforms” to the guidelines set forth by Fannie Mae and Freddie Mac. These loans may as well be considered “government loans” too b/c they have an implicit guarantee by Fannie and Freddie, and Fannie and Freddie are heavily controlled or regulated by the Federal Government.

JUMBO LOAN DEFINITION

Jumbo loans are simply conventional loans that exceed the “conforming loan limit” for a particular county or area.

Making matters confusing is the fact that some jumbo investors will accept loan amounts that are also within the “conforming loan limit” range, e.g. $548,250 to $822,375 in much of California.

THIS is why some lenders (like JVM) can offer so much lower rates on occasion for so called “high balance conforming loans;” our jumbo rates are far lower than our conforming rates for reasons explained in this blog.

Many lenders do not have access to these jumbo investors so they are stuck quoting only conforming loan rates, and I always feel really bad when we are winning over their borrowers (or not 😊).

EASIEST TO QUALIFY FOR?

VA and FHA loans are the easiest to qualify for, followed by conforming loans, and then followed by jumbo loans.

It is important to remember that our best jumbo loan options require such strong qualifications, that many conforming borrowers cannot meet them (so we can only quote conforming rates).

ANYWAY – if a borrower does not qualify for a “jumbo loan” she might ask if she can still qualify for a “conforming” or a “government” loan, but it would be confusing to ask if she still can qualify for a conventional loan b/c a jumbo loan IS a conventional loan.

Got it?

If not, no worries.

We will still understand what people mean when they ask for a conventional loan.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167