Conforming vs. Non-Conforming Home Purchase Loans
No matter if you purchased a home before or this is your first time, demystifying the mortgage industry can help you make an informed decision. Your main contact will begin with a Mortgage Broker or Mortgage Banker. The difference is the access to resources available to these professionals. Both have Conforming and Non-Conforming lending products. Your mortgage partner, the Broker or Banker should have the skills to show you the difference in your fee's and monthly payment comfort zone before you sign on the bottom line to buy the home.
Who decides what’s conforming and what’s non-conforming? Fannie Mae and Freddie Mac, the two stockholder-owned corporations that purchase mortgage loans from lending institutions. They package the mortgages into securities and sell the securities to investors. By doing so, a continuous flow of affordable funds for home financing 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, also known as jumbos, are for borrowers whose situations do not “conform” to strict Fannie Mae/Freddie Mac underwriting guidelines.
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 are many circumstances which might otherwise prevent you from conforming financing, and they include:
~ Complicated tax returns
~ If you do not wish to disclose or document your income or No-Doc Loans
~ High debt ratios
~ Current or previous credit difficulties
~ If you want to repay federal tax liens
~ If you want to recoup equity from your homestead
What if you don’t have any of the above circumstances? Then you’ll most likely qualify for a conforming loan. 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. These loan limits are 50 percent higher for loans made in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Properties with five or more units are considered commercial properties and are handled under different rules.
The 2019 conforming loan limits are $314,827 for a one-family residence; $403,125 for a two-family residence; $487,250 for a three-family residence; and $605,525 for a four-family residence. The loan limits are based on a mathematical equation and can vary from county to county across the US. These limits can change from county to county in the Metro Denver area depending on the micro-market of the area you are looking at. Call me or your Mortgage Partner for specific information.
One way to bridge the gap between the conforming limit and a high purchase price is to employ piggy-back financing. This involves getting 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 because you’ll be paying a higher interest rate (anywhere from 1-3 percent over the first-mortgage rate). Just one example of why hiring a professional to help you finance and purchase your new home works in your favor!
UPDATE: On September 18, 2019 the Federal Reserve lowered the overall interest rates. The effect of the cuts leans more toward other interest products than the Mortgage Interest rates. You might see a little more interest given on your savings account or less on your car loan but mortgage interest rates are still in the buyers favor hovering around 4%. Nows the time to buy, ask me why!