What Are Conforming and Non-Conforming Loans?

The Basics

A conforming mortgage is a loan that the government-sponsored offices of Fannie Mae or Freddie Mac are willing to purchase. The reason these offices would be interested in purchasing such a mortgage is that the specified loan must meet the dollar limits set by the companies. Since the government is connected so strongly to these two enterprises, Fannie Mae and Freddie Mac have lower borrowing costs than other private lenders. As a result, they are able to offer lower interest rates on mortgages that do meet their requirements.

• Fannie Mae and Freddie Mac were created to help stabilize the mortgage market. These organizations are able to buy out mortgages from private lenders and then sell them as mortgage-backed securities. As a result, these two enterprises are able to cover 80 percent of conventional mortgages.

The Upside

If you already have an older, nonconforming mortgage that meets the new requirements for the maximum amount allowed by the government-sponsored enterprises, you may be eligible to refinance your mortgage as a conforming loan. You could knock off some significant savings on your interest rate each month. By doing this. If you are just setting out to get a loan, having the government-sponsored enterprise backing can allow you to reduce your interest rate. With the increase in the maximum size of conforming loans, some homeowners with bigger mortgages that would have previously been considered jumbo loans can now take advantage of the benefits.

• The amount of the mortgage is the most basic way to determine whether your loan amount will meet the requirements for a conforming loan. Although going with a non-conforming loan is not necessarily a negative option, being able to get a conforming loan typically offers borrowers more positive benefits.

What Doesn’t Count As a Conforming Loan?

A non-conforming loan is what is offered to a borrower when he or she does not meet the qualifications for a conforming loan. Some homebuyers may find that this is their only option for getting a mortgage. The downside of going with this type of loan is that it typically will have a higher interest rate, it may have additional fees and insurance requirements, and it doesn’t come with the advantages offered by a conforming loan.

The most well-known type of non-conforming loan is the jumbo loan. This means that the loan amount is simply too high to meet the requirements of a conforming loan. Since jumbo loans failed to meet the requirements, they can be difficult to sell in the secondary market. Lenders feel less confident about the possibility to resell this type of mortgage, so they have to charge the higher interest rate to the borrower to make up for this risk.

• In most areas, the limit for a conforming loan is $417,000. This number can be increased if the property is located in an area with higher home values/costs of living.
• The most common reason for going with a non-conforming loan are that it’s required for a higher-priced property. This relates most often to second homes, personal investment properties, and luxury primary residences.

Other Non-Conforming Loans

The jumbo loan is not the only type of mortgage that can’t be classified as a conforming loan. Here are some other examples:

• Loan To Value Ratio: This refers to the percentage of the home’s purchase price that is paid for with a mortgage. Generally, you are eligible to borrow up to 90% of the homes purchase and still meet the qualifications for a conforming loan. Beyond that, you are most likely not eligible for a conforming loan.
• Documentation Issues: In order to obtain a conforming loan, you must be able to provide total employment history documentation, details about your assets, and documents that prove your income. If you don’t have all of these details in place, you might be in eligible for a conforming loan.
• Loans For Applicants With Poor Credit Scores and Credit history: Since 2009, it has been required that borrowers attempting to receive a conforming loan must have a good credit score and credit history.

Loans For Those With Debt-To-Income Challenges: This ratio is known as debt-to-income, and if your taxes, insurance, debt payments, and monthly mortgage obligations add up to more than 45% of your monthly pretax income, you may not be eligible for a conforming loan.