Conforming Loans Explained
When speaking of mortgages the terms “conventional” and “conforming” are often used interchangeably. A conforming loan simply means that the loan guideline standards established by the conforming loan limit and all Freddie Mac (the Federal Home Loan Mortgage Corporation) funding criteria and Fannie Mae (the Federal National Mortgage Association) funding criteria have been met by this particular loan. The conforming loan limit is set by Freddie Mac and Fannie Mae’s Federal regulator, OFHEO, each year.
The main guideline established by this limit is the size of the loan, and there are two size limits. One is standard and one is for high-cost areas. Mortgages that go over this limit are non-conforming “jumbo” mortgages. The conforming limit in most US counties for one-unit properties is around $424,000, but in high-cost areas the maximum loan limit for one-unit properties is nearer to $630,000.
Other guidelines in the conforming loan limit concern (among others) the credit history, debt-to-income ratio, and loan-to-value ratio of the borrower.
Do I want to have a Conforming Loan?
Non-conforming loans tend to have much higher interest rates than conforming loans, making the latter a much more attractive option for borrowers. Conforming loans also deal with less money than non-conforming loans, making the investment less risky for lenders.
The only time you would not want a conforming loan is if you require a loan higher than the county’s loan limit. This is called a “jumbo” loan because it is greater than $424,000 in most counties in the country.
Details of Conforming Loans
Through Fannie Mae or Freddie Mac, conforming loans can have 3% down payments if the borrower is a first-time home-buyer, but there are no other fees that must be paid upfront. They also offer better interest rates for those with higher credit scores. PMI is required as well but can be dropped if the LTV decreases to 78%.