Conforming vs. Non-Conforming Loans

Real Estate

Are you confused over the terms “Conforming vs Non-Conforming” loans? You are not alone, many people, because they do not understand these terms assume (due to credit history, self-employment or high debt ratios) they won’t qualify for a mortgage. This is not necessarily true.

Who decides what’s conforming and what’s non-conforming?

Fannie Mae and Freddie Mac, of course. These the two stockholder-owned corporations purchase mortgage loans from lending institutions. They then package the mortgages into securities and sell the securities to investors. By doing this, Fannie Mae and Freddie Mac, provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for Americans. Fannie Mae and Freddie Mac guidelines also establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties.

Non-Conforming Loans

First lets discuss non-conforming loans, which are also known as “jumbos”. A non-conforming loan can be the ticket to home ownership for many with unusual circumstances. The terms are actually quite descriptive: non-conforming mortgage loans are for borrowers whose situations do not “conform” to strict Fannie Mae/Freddie Mac underwriting guidelines.

The good news is that credit specifications are more lenient than any other type of financing. In other words, non-conforming loans are much easier to qualify for than conforming loans. They also close faster, have reduced or no reserve requirements, allow expanded use of loan proceeds and provide higher levels of cash out for debt consolidation. There is no stigma attached to this type of financing, and it’s not even designed to be a permanent financing situation. Non-conforming loan programs can actually help you improve your credit. By having a mortgage, and keeping up current payments and cleaning up the rest of your credit, in two or three years you may qualify for conforming financing, even if you’ve had a foreclosure or bankruptcy. Why should you be interested in switching to conforming financing? Because the interest rates are lower.

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Recently, the traditional way of making mortgage loans has undergone changes in some lending circles. By combining the elements of a reasonable down payment and slightly higher rates, some lenders are finding it more attractive to offer non-conforming loans.

There are many circumstances which might otherwise prevent your from conforming financing, and they include: self employment; complicated tax returns; if you do not wish to disclose or document your income; high debt ratios; current or previous credit difficulties; if you want to repay federal tax liens; and if you want to recoup equity from your homestead.

Loan Limits

The most important difference between conforming and non-conforming loans, however, is loan limits. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit that changes each year. Properties with five or more units are considered commercial properties and are handled under different rules.

The 2018 conforming loan limit is $453,100 for a one-family residence. Jumbo loan values exceed these limits, making them nonconforming loans. Lenders view nonconforming loans as riskier because Fannie and Freddie won’t guarantee them. If a borrower stops making payments and the jumbo loan defaults, lenders know they’ll be responsible for the loan.

As for limits on jumbo loans, that’s up to the lender. Once you’re in the realm of nonconforming mortgages, you can borrow as much as your lender will agree to loan.

So, what if you want a house that’s above the conforming price limit and you don’t want the higher interest rate of a non-conforming loan? One way to make up the difference between the conforming limit and a high purchase price is to get a first mortgage for the conforming limit and make up the difference with a second mortgage. A word of caution, however: You should only do this if you plan to pay off the second mortgage quickly.

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