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.
What’s the difference between a conforming and a nonconforming loan?
When you get a mortgage, 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 Fannie Mae, Freddie Mac or FHA 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.
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 nonconforming 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 $417,000 in the lower 48 states. It’s $625,500 for Alaska and Hawaii.
The limits on conventional loans are the same as the national maximum amount for FHA, except that they are generally flat nationwide.
Higher limits apply in 39 high-cost counties. In these counties, you can get a high-balance mortgage up to the county limit.
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 nonconforming territory.
Nonconforming loans are loans that aren’t bought by Fannie Mae, Freddie Mac, FHA or VA. The reason is typically higher loan limits and the major investors don’t purchase these bigger loans.
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 debt-to-income (DTI) ratio has to be a lower than it would be on a regular loan (43% is a good guideline).
- Your lender may require additional documentation due to the size of the loan.
As always, talk to your lender regarding specific requirements.
Still have questions about conforming and nonconforming loans? We’ll be happy to answer them in the comments below.
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