Conforming Loans vs. Non-Conforming Loans

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There are two primary types of mortgage loans: conforming loans and non-conforming loans. If you’re looking to purchase or refinance a home, it pays to learn the difference between the two. Securing the right kind of loan for your situation could help you get the house of your dreams, or even help you save money.

What is a conforming loan?

conforming loan is a mortgage that meets the standards set by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA). Each year, the FHFA sets the maximum dollar amount for mortgages that Fannie Mae and Freddie Mac will purchase or guarantee.

The Housing and Economic Recovery Act (HERA) requires that the baseline conforming loan limit be adjusted each year to reflect the change in single-family home values. In anticipation of an official announcement from the FHFA, expected in late November, Loan Pronto is now honoring conforming loans up to $715,000, a 10.48% increase from 2022’s conforming loan limit of $647,200. In high-cost areas like Alaska and Hawaii, borrowers can receive conforming loans up to $1,073,000. If you need a home loan that exceeds the loan limit for your county, you will need a non-conforming jumbo loan.

Securing a loan that conforms with the guidelines set by Fannie Mae and Freddie Mac has important advantages. Because they’re less risky for lenders, conforming loans typically come with lower interest rates and therefore lower monthly payments. Along with saving you money, conforming loans have standardized guidelines and forms that provide greater borrower protection. Home loans that fail to meet the standards set by Fannie Mae, Freddie Mac, and the FHFA are known as non-conforming loans.

What is a non-conforming loan?

non-conforming loan is a mortgage that does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. GSE guidelines consist of a maximum loan amount, down payment requirements, and debt-to-income (DTI) allowances, among other factors.

Non-conforming loans commonly include government-backed mortgages – FHAVA, and USDA loans – and jumbo loansJumbo loans are the most popular type of non-conforming loan and are used for properties that exceed the maximum loan limit set by the FHFA.

Government-backed loans are insured by the federal government and have different cost structures and eligibility requirements. For example, with a government-backed mortgage, you can qualify with a lower credit score, higher DTI, and/or a lower down payment than you would with a conforming loan. Even if you’re borrowing an amount that qualifies for a conforming loan, you may find that a government-backed mortgage better fits your needs.

Since non-conforming loans pose a greater risk than conforming loans, lenders will compensate with stricter and more expensive underwriting guidelines. If the price of your desired home exceeds the conforming loan limit for your county, you should expect higher interest rates, higher closing costs and fees, and a heftier down payment requirement compared to a conforming loan. As well as being more expensive, you will also need a high credit score, low DTI, high cash reserves, and extensive documentation to qualify for a jumbo loan.

Despite the higher costs of jumbo loans and stricter guidelines needed to qualify, there are many benefits to non-conforming loans. Non-conforming government-backed loans usually have lower credit and down payment requirements whereas jumbo loans give you access to higher loan maximums and therefore, more properties. If you don’t qualify for a conforming loan, a non-conforming loan might be right for you.

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