Conforming and Nonconforming Loans: the Differences
Conforming loans are those that are generally for a sum lower than $679,650, and have the backing of Freddie Mac and Fannie Mae. Nonconforming (“jumbo”) loans will be for larger sums than this and will attract higher interest rates. Essentially, a conforming loan is one that meets the Fannie Mae and Freddie Mac guidelines, and a non-conforming loan is one that does not. Conforming loans generally have lower interest rates as well as lower fees. These loans are popular with lenders as they can sell them on, which gives them more capital with which they can provide further loans.
What are conforming loans?
Fannie Mae and Freddie Mac, companies sponsored by the government, essentially control the mortgage market. They allow mortgage companies to pool their loans into bundles that they can sell as investments, using the funds gained to issue more loans.
Conforming loans are advantageous, and you can obtain one by sticking to property that is at or below the conforming loan limit for the region in which you want to buy. Fannie Mae and Freddie Mac have a legal obligation to buy out mortgages below the conforming loan limit. The conforming loan limit is set by the Federal Housing Finance Agency: in 2018 it is $403,100, but in areas where property is more expensive it is raised, e.g., for Alaska, Washington DC, and other high-priced metropolitan areas the limit is $679,650. In certain cities in Hawaii and California, the limit is even greater.
Conforming loans are highly advantageous; the tool below shows you what the conforming loan limit for your area is.
Conforming loans have lower qualification requirements, frequently require less cash down, can offer you lower interest rates, and may still be attainable with a less than perfect credit rating.
Staying within the conforming loan limits for your county will get you more advantageous mortgage terms. This tool will show you what the
What are Nonconforming Loans?
A nonconforming loan is called a “jumbo” loan. Different mortgage lenders will have different terms and conditions for such mortgages, but in general, because of the high level of risk involved, jumbo loans will attract higher rates of interest. Nonconforming loans frequently require down payments of 20% plus, an excellent and rigorous proof of income and assets, and higher rates of interest.
More: what you should know about jumbo loans
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Which of these is most important to you?
- Low down payments
- personal service
- Being able to apply online
- closing quickly
- low-interest rates
Other Types of Nonconforming Loans
A loan isn’t always nonconforming just because of its size. Loans can also be called nonconforming or any of these reasons:
- Credit rating for previous credit problems
- A high debt to income ratio
- Down payments of lower than 20%, affecting the loan to value ratio
It is important to note that low down payments don’t necessarily make your loan nonconforming. Fannie Mae offers first-time purchasers a program with 97% LTV; i.e., your loan will still be rated as a conforming loan with just a 3% down payment. Fannie Mae also has a program for previous/current homeowners that requires a low 5% down payment.