What Is the Difference Between Conforming & FHA Mortgages?

by Ciaran John

    Government agencies define the parameters for both conforming mortgages and home loans backed by the Federal Housing Administration. Both types of mortgages are subject to dollar limits, and borrowers often have to buy mortgage insurance. Despite the many similarities, FHA-backed loans work very differently from conforming mortgages.

    Government-sponsored mortgage enterprises Fannie Mae and Freddie Mac buy residential mortgages from banks and other financial institutions. The mortgages must "conform" to certain standards in terms of size -- they are therefore said to be "conforming." Large loans are referred to as "jumbo" loans and are ineligible for purchase by Freddie Mac or Fannie Mae.
    While conforming loans are identified based on dollar amounts, FHA loans are identified based on loan guarantees. The FHA does not issue or buy loans, but it does insure certain residential home loans and these are referred to as FHA mortgages.

    The Federal Housing Finance Agency sets limits for conforming loans and these maximums are reviewed on an annual basis. Currently, different limits apply to one-, two-, three- and four-unit properties. Standard loan limits apply to most parts of the nation, but Hawaii and certain other areas are designated as high-cost-regions. Loan limits for conforming mortgages in these areas are higher than in the rest of the nation.
    FHA loans are also subject to maximum dollar amounts, although these loans are only indirectly tied to conforming loan limits. The FHA sets its loan limits on a county-by-county basis, and these annually set maximums are usually set as a percentage of the FHA's conforming loan limits.

    You can use an FHA-backed loan to buy or to refinance a residential home. In either case, you must have 3.5 percent equity in the property, since the FHA does not insure loans exceeding 96.5 percent of the property value. Slightly larger down payments are required for conforming mortgages. Freddie Mac and Fannie Mae finance up to 95 percent of the property value on a single family home. The same entities cap loan amounts at 80 percent on cash-out refinance loans.

    When you finance your home with an FHA-backed loan, you must pay mortgage insurance premiums to the FHA. The premiums cover the cost of insuring your loan. One premium, the up-front mortgage insurance premium or UFMIP, is added to your loan balance, and therefore it remains in place for the life of your loan. You also have monthly mortgage insurance premiums, which in some cases can be cancelled when you have sufficient equity in your home.
    By contrast, you don't finance a large up-front premium as part of a conforming loan; you pay only monthly mortgage insurance. You obtain the insurance from a private insurer rather than the FHA. You can request to have the insurance dropped once you have 20 percent equity. Your lender must cancel it automatically once you have 22 percent equity in your home.

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    About the Author

    Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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