From the moment you enter into the homebuying arena you’ll notice that you need to learn a whole new language. From the mortgage process to the title process and more, there is a lot to learn.
The mortgage process seems to offer up the most confusing terms, according to our clients. One of those is “conforming loan.” Yes, it sounds boring, but you really should know all about it. So, let’s dive in.
A conforming loan is, in a nutshell, a conventional loan. But there’s more to the definition.
“A conforming loan is a mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Freddie Mac and Fannie Mae,” according to Troy Segal, finance writer at Investopedia.com.
This basically means that conforming loans have a dollar limit and it adjusts annually.
Lenders love these loans because they’re sellable on the secondary mortgage market. Segal claims that they “… typically offer lower interest rates than other types of mortgages as well.”
Here comes the lingo
Let’s get to know the players in the conforming loan game.
The Federal National Mortgage Association, also known as FNMA or, more commonly, Fannie Mae. FNMA is a GSE, or government-sponsored enterprise.
The Federal Home Loan Mortgage Corporation, also known as FHLMC, or, again, more commonly as Freddie Mac. FHLMC is a GSE.
What is a GSE and why should you care?
Let’s take the last part of that question first. You should care because GSEs were created to “… help the American consumer,” according to the experts at Quicken Loans.
Like FHA loans, a GSE doesn’t underwrite mortgages. “Instead, a GSE can guarantee a third-party loan … to borrowers, rather than issue them directly,” say the experts at Quicken.
But here’s the real benefit, they say:
“By having that third-party guarantee the loan, banks can then lend money to home buyers who seek a mortgage, but may have lower credit or lower income than would typically be required.”
Also, because GSE mortgage loans have the power of the federal government behind them, many GSE mortgages come with lower interest rates as well.
Ok, back to conforming loans
As mentioned earlier, a conforming loan is also known as a conventional loan. It differs from a non-conforming loan, such as a jumbo loan, in that it meets the requirements to be sold by either Freddie Mac or Fannie Mae.
For you, the homebuyer, the conforming loan has one big advantage over its non-conforming cousin: Lower interest rates.
“For first-time homebuyers taking out Federal Housing Administration (FHA) loans, for example, the down payment can be as low as 3.5%,” according to Troy Segal at Investopedia.com.
Conforming loans are limited as to the amount a consumer can borrow. This limit changes every year. In 2022, for example, the limit is “$647,200 for most of the United States,” claims Segal.
In higher-cost markets such as New York City and San Francisco, the 2022 limit is $970,800. Then there are special “statutory provisions” which establish the loan limits for borrowers in Hawaii, Alaska, the U.S. Virgin Islands and Guam. Those limits, in 2022, are also $970,800.
Additional qualifying rules for a conforming loan include:
- Credit score
- Credit history
- Debt-to-income ratio
- Loan-to-value ratio
Yes, the mortgage process is confusing for newbies. But it pays to be informed.