To Conform or Not to Conform?

Being in real estate it helps to understand the mortgage options, loan process and anything else that may help (or hurt!) a transaction in order to best serve clients. Obviously not all mortgage bankers & lenders are alike so it is very helpful to have a relationship with good mortgage sources that you feel safe with. I have a few!

Now, onto the differences between conforming & non-conforming loans...

The most common home loans fall into one of two categories: conforming or non-conforming. The conformation is referring to the guidelines of whether or not a loan can be sold to either of the two largest mortgage purchasers: Fannie Mae or Freddie Mac. The loans that conform to their guidelines are fittingly called conforming loans and those that do not, non-conforming loans. 

Conforming Loans

The standardization of these loans means there are underwriting rules & loan requirements:

• Minimum credit score: 620
• Maximum loan limits: $625,000 (increased from $548,250 in 2022)
• Maximum debt-to-income ratio: 43% (Can potentially go up to 49%)
• Minimum down payment: 5%, 3% for first time homebuyers*
  *This will require paying for private mortgage insurance (PMI) unless you put 20% down. PMI generally ranges between 0.58% - 1.86% or this can be bought out if eligible. 

Benefits:

• • Lower interest rates
  • Standardized process means there are not odd lender requirements & less strict guidelines
  • Some federal protections (Ex. during Covid the federal moratorium on foreclosures protected owners with conforming mortgages)

Drawbacks:

• • The maximum loan amount may not suffice for higher cost of living areas
  • Government backed loans such as VA, FHA or USDA may be a better option for buyers that qualify for these programs

Non-Conforming Loans

These loans do not meet Fannie Mae or Freddie Macs requirements and include jumbo loans & the government backed loans such as FA, VHA or USDA. 

• Minimum credit score: 580 for government loans, 680 for Jumbo loans
• Maximum loan limits: Varies by program & lender
• Maximum debt-to-income ratio: Varies by program & lender, 43% usually for Jumbo loans
• Minimum down payment required: Varies by program & lender but 20% will favorably impact approval for Jumbo loans. 

Benefits:

• • Enables a buyer to afford a more expensive home
  • Enables different classifications of buyers to be able to purchase a home

Drawbacks: 

• • These are riskier loans for a lender so increased requirements will exist
  • Usually feature higher interest rates

It's important to understand that not all lenders are the same! For example not all lenders can provide construction loans and if buying acreage or a large parcel of raw land, it may be beneficial to work with a lender that is active in those types of purchases. I have a few excellent lender sources that are local, knowledgable and offer a high level of service to their clients. Contact me if you would like more information!

Click the article below for an overview of the 6 most common types of mortgages:

Forbes - 6 Most Common Mortgages