A conforming loan is the loan option most borrowers turn to when purchasing a home. These loans meet the guidelines of the two government housing agencies, Fannie Mae and Freddie Mac. As a result, the eligibility, pricing, and features of a conforming loan are more standardized. You may receive a lower interest rate and more reasonable loan terms than you would find on a non-conforming loan.
What Are Non-Conforming Loans?
These types of loans are often known as “jumbo” loans. They don’t fall under the standards of Fannie Mae and Freddie Mac, and so are not backed by government entities. They carry more risk to the lender.
Non-conforming loans are above the loan limits of conforming loans. The loan limit can vary by the area and usually change annually. High-demand housing markets such as Alaska and Washington D.C. have higher limits due to the cost in the market.
These loans often require a minimum down payment of 20% and have stricter credit qualifying criteria, higher income requirements, and a higher interest rate.
Benefits of a Conforming Loan
Conforming loans offer many benefits. The main advantage is that conforming loans tend to offer a lower interest rate than their counterparts. You pay less over the life of the loan in the way of monthly mortgage and interest. Lenders carry less risk with conforming loans since government agencies such as Freddie, Fannie, and Veteran’s Affairs will back the loans in case of a default.
Lenders may be more easygoing on factors such as your income and debt-to-income ratio. There could also be more wiggle room with your credit score when qualifying for a conforming loan. Your down payment can generally fall below 20% and in some cases, there is no down payment.
Qualifications for a Conforming Loan
Specific requirements will need to be met to qualify for a conforming loan, and these may vary by lender. There are primary factors that determine if you are eligible for a conforming loan. These factors include:
Credit score – The higher your credit score, the more likely it is that you’ll be approved for a conforming loan. It could even lower the down payment requirement for the type of loan you are requesting.
Loan-to-value ratio – This ratio is the amount that you wish to borrow against the value of the home you are purchasing. For example, if your loan-to-value ratio is 80 percent, you can only borrow up to 80 percent of the home’s value.
Cash reserves – The requirement that defines the cash assets that you must have in reserve will vary by the type of loan. In some cases, you will have to have at least six months in reserve.
Debt-to-income ratio – The ratio of your total monthly debt payments against your before-tax income is considered your debt-to-income. This monthly debt payment will include your mortgage payment.
The number of units – Single-family, two-unit, and three-or-four-unit properties all have different requirements involved.
If you have any questions about how to secure a conforming loan, give the experts at NASB a call at 855-465-0753.