Conforming Loans: Are They Right for You?
When shopping for a new home, you can choose from several loan products to help finance your purchase. With so many options, mortgage lenders and government agencies use uniform guidelines to describe and categorize home loans. Conforming loans make up one of these categories. Cracking the code on this kind of mortgage isn’t as complicated as it might sound, and it can help you decide what kind of loan is best for you.
What does conforming mean?
The key to understanding conforming loans is built right into the name. They’re any and all mortgages that conform to government-sponsored enterprise (GSE) guidelines established by the federal government. Anything that doesn’t meet these requirements is called a non-conforming loan and most mortgages will fall into one category or the other. GSE guidelines include limits on mortgage values, down payment sizes, loan documentation, and qualification requirements for debt-to-income ratios, credit histories, and credit scores.
What are these guidelines for?
GSE guidelines are set by the Federal Housing Finance Agency and determine which mortgages can be purchased by government entities like Fannie Mae and Freddie Mac. These financial companies were created by Congress to help keep the housing market liquid, stable, and affordable.
Government-sponsored enterprise (GSE) guidelines categorize loans based on risk.
Fannie Mae and Freddie Mac bundle, buy, and sell mortgages to keep the market moving. But since riskier mortgages are more likely to fall into default and potentially damage the market, they have to focus on minimizing that chance. This is where the guidelines come in. Non-conforming loans can be riskier, which is why they can’t be bought or sold by Fannie Mae or Freddie Mac.
So what are the limits?
A few different factors can push a loan from conforming to non-conforming. The biggest factor is mortgage size. For a loan to fit within the guidelines it can’t be for more than:
$424,100 base limit for a one unit home
$543,00 base limit for a two unit home
$656,350 base limit for a three unit home
$815,650 base limit for a four unit home
Generally, mortgages that are more than $424,100 are just too big to fall into the conforming category. In fact, mortgages larger than the limits are called jumbo loans and they’re usually a little riskier than their conforming counterparts. For this reason, jumbo loans have stricter qualification requirements and might carry higher rates.
Can limits and guidelines change?
Loan limits are based on median home prices and since prices fluctuate with the market, the limits can change too. The $424,100 base limit is relatively new and was only established in January of 2017, before that conforming loans weren’t allowed to be for more than $417,000. Since prices can also change based on location, places with steep markets have higher limits. Finding out what the limits are for your area is as easy as contacting your mortgage banker, they’ll have all of the info you need to help you choose the best loan for you.
What else makes a loan non-conforming?
Though size is the most common, it’s not the only factor that can push a loan into non-conforming territory. Some equally important reasons that a loan can start drifting away from the guidelines include:
A low down payment (less than 20%)
A high debt-to-income ratio
A low credit score
Other credit history inconsistencies
Like with most rules, there are some exceptions to these. For example, some programs for first-time homebuyers make it possible to provide a lower down payment without the loan having to be a non-conforming loan.
Do both kinds of loans have benefits?
Yes! Neither kind of loan is necessarily better than the other. Knowing which one is best for you depends on what you need from your mortgage. Conforming loans are great because they often have lower interest rates, which can save you lots of money in the long run. These mortgages also tend to be more stable investments, so they can come with standard, more flexible underwriting requirements. Non-conforming loans are usually riskier investments, which means they have stricter underwriting requirements and may carry higher interest rates. But they’re a good option if you want to borrow a higher than average amount of money for your dream home. The best thing to keep in mind is that the ideal mortgage is the one that fits your finances and can help you reach your dreams. So many different factors can come into play when determining if a loan will be conforming or non-conforming, which makes having questions or wanting guidance normal. For answers about conforming loans, non-conforming loans, or anything else related to your home buying journey, speak to your mortgage banker today or find a mortgage banker on Atlantic Bay.