Back in my 11th grade English class, we used to have these weekly vocabulary quizzes. To make them interesting, I tried to relate everything to a theme.
There’s a lot of unfamiliar vocabulary in the mortgage process, and it’s important to know your terminology. For example, construction of the Batcave was probably too expensive for Bruce Wayne to get a conforming loan.
If you’re looking to buy or refinance a home , it’s important to understand some of this mortgage lingo. What’s the difference between a conforming and a non-conforming loan? What are the benefits of each?
What Is a Conforming Loan?
A conforming loan is one that meets the requirements to be sold to Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), USDA or Department of Veterans Affairs (VA). To understand what these investors do, let’s take a step back.
Sometimes banks hold on to your loan for 15 or 30 years, depending on your loan term. They make the money back every month when they collect your payments. This isn’t very common anymore.
What usually happens now is that your loan is sold to one of the major mortgage investors within days of the closing. This allows lenders to have stable cash flow, so they can write new loans and get more qualified buyers into more homes. You may still send your payments to your lender if they service your loan. Quicken Loans services 99% of the loans it originates.
The rules for Fannie Mae and Freddie Mac are set by the Federal Housing Finance Agency (FHFA), and the FHA has some of its own policies.
The first big difference between a conforming and a non-conforming loan is the loan’s limits.
On an FHA loan, the loan limit varies by county. The maximum amount on a regular loan for a one-unit property is generally $453,100 in the lower 48 states. It’s $679,650 for Alaska and Hawaii. The higher figure also serves as the upper loan limit in high-cost counties.
The limits on conventional and VA loans are the same as the national maximum amount for FHA, except that they are generally flat nationwide.
Higher limits apply in high-cost counties. In these counties, you can get a high-balance mortgage up to the county limit. In no instance will the mortgage amount you can get be higher than $679,650 on a conforming loan.
Anything above county limits is a jumbo loan. Jumbo loans have higher loan limits, and slightly different guidelines because the mortgage can’t be sold to Fannie Mae, Freddie Mac, FHA and VA, and pushes into non-conforming territory.
Conforming Loan Guidelines
In addition to the loan limit restrictions, you have to meet certain other requirements in order to get a conforming loan.
You have to meet the credit guidelines of the agency that’s buying the loan. For conventional loans, Fannie Mae and Freddie Mac accept a median FICO® Score of 620 or higher. With an FHA loan, you can purchase a home or do a rate/term refinance with a median credit score as low as 580. A cash-out refinance under FHA will require a 620 credit score. At higher credit scores, you may be able to have a slightly higher debt-to-income ratio (DTI), which will allow you to afford a higher monthly payment.
Although USDA and VA loans don’t have prescribed minimum credit score requirements, lenders may set their own policies. At Quicken Loans, clients must have a 620 median FICO Score to qualify for these loan options.
There are also items like property guidelines and income restrictions that impact whether or not you qualify for certain loans, but the nitty-gritty details of individual loan options are beyond the scope of this post. A Home Loan Expert will work to find the best option for you.
Benefits of Conforming Loans
Conforming loans have pretty well-defined guidance and because of that, the risk factors for various loans are well understood. There are a number of programs catering to different types of buyers. While lenders will have slightly different standards, the conforming loan options offered are available from a number of different lenders, so you can really shop around for a lender who you’re comfortable with and who can match you with the right loan option to meet your goals.
Although these are general statements and every situation is different, the following are benefits of conforming loans.
- For loans with standard limits, you may be able to get a lower rate than you could with a non-conforming loan.
- Although there’s some variation, the qualification standards are pretty well defined across lenders
What Is a Non-Conforming Loan?
Non-conforming loans are loans that aren’t bought by Fannie Mae, Freddie Mac, FHA, USDA or VA.
One of the more common types of non-conforming loans is a jumbo loan, which comes with higher loan limits. At Quicken Loans, we do loans with limits of up to $3 million.
The good news is they typically come with similar rates to any other loan. There are just a couple of things you need to know.
- Your DTI has to be a lower than it would be on a regular loan (43% is what we require).
- Your lender may require additional documentation due to the size of the loan.
Although jumbo loans are the most common type of non-conforming loan, there are other types as well, which may enable someone to buy a piece of property that they otherwise couldn’t with a conforming loan. Sometimes a non-conforming loan may help someone with a credit issue such as a recent bankruptcy, although they’ll likely have to pay a higher rate in order to compensate for the additional risk.
Benefits of Non-Conforming Loans
When it comes to non-conforming loans, there are really three big benefits:
- Higher loan amounts available in the case of jumbo loans
- Depending on the loan option, you might be able to buy different types of property than you could with a standard conforming loan
- You might be able to get a non-conforming loan if you have a negative mark on your credit like a recent bankruptcy
As always, talk to your lender regarding specific requirements.
Are you ready to buy a home or refinance your existing one? You can get started online with Rocket Mortgage® by Quicken Loans . One of our Home Loan Experts would also be happy to speak with you at (800) 785-4788.
Still have questions about conforming and non-conforming loans? We’ll be happy to answer them in the comments below.
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