Prospective homeowners getting organized to make an offer on a home quickly learn how many options there are when it comes to both lenders and mortgage options. From conventional to jumbo, FHA to VA, there are all kinds of loan products. And the more you know about each of them, the better equipped you are to zero in on the best choice for your needs. Here’s what to understand about conforming and nonconforming home loans.
As the name implies, a conforming loan is a type of conventional loan that conforms to specific requirements, including financing limits set by the Federal Housing Finance Agency (FHFA) and underwriting guidelines set by Fannie Mae or Freddie Mac. These entities are sponsored by the federal government and responsible for a secondary mortgage market. They buy conforming loans from lenders, which frees these mortgage companies to continue lending to prospective homeowners.
You may have heard of the conforming loan limit, which is a national value set by the FHFA. Fannie Mae and Freddie Mac are bound by federal law to purchase different kinds of mortgages below the conforming loan limit. In 2020, the limit is $510,000, although it can vary in different markets. In particularly high-demand housing markets, like California, Hawaii, and Washington, D.C., it’s much higher.
Benefits of Conforming Loans
To qualify for a conforming loan, you’d need to look for a home that would put you beneath the conforming loan limit. Here in Nevada, it’s the same as the national value — $510,000. There are several benefits to this kind of loan that make them appealing to prospective borrowers. Conforming loans can be easier to qualify for, and they may have both lower interest rates and down payments. There may also be more relaxed standards for qualifying credit scores.
We’ve written about jumbo loans before, which is another term for nonconforming loans. These are loans for amounts above the conforming loan limit, and conditions and terms can vary significantly from one lender to the next. Typically, mortgage rates for these kinds of loans will be higher because of the increased risk to the lender.
The nonconforming loan label applies to more than just mortgage size. If you have a low credit score, a high debt-to-income ratio, or a down payment that’s less than 20% of the home’s value, your loan will likely qualify as nonconforming. It is still possible, however, to get a conforming loan with a low down payment — ask your lender for details about products from Fannie Mae and Freddie Mac to learn more about your options.
Here in Reno and Sparks, the Cushing Team at Guild Mortgage can answer all of your questions on conforming and nonconforming loans. If you’re ready to buy or re-finance, contact or call us today.