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, not that the multi-billionaire founder of Wayne Enterprises needs one, but I digress.
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 or Freddie Mac. To understand what Fannie and Freddie 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 a couple of months of 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). Other major mortgage investors include the FHA, USDA and VA. Although these loans are backed by the federal government and have their own lending guidelines, when a lender refers to a conforming loan, they’re talking about conventional loans backed by Fannie Mae or Freddie Mac.
The first big difference between a conforming and a non-conforming loan is the loan’s limits.
The maximum amount on a regular loan for a one-unit property is generally $484,350 in the lower 48 states. It’s $726,525 for Alaska and Hawaii. The higher figure also serves as the upper loan limit in high-cost counties.
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 for a one-unit property be higher than $726,525 on a conforming loan. If you’re buying a multi-unit home, higher limits do apply.
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 or Freddie Mac and pushes into non-conforming territory.
Conforming Loan Guidelines
In addition to the loan limit restrictions, you must 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.
There are also items like property guidelines and income restrictions that impact whether 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 well-defined guidance and because of that, the risk factors for various loans are well-understood. There are several programs catering to different types of buyers. While lenders will have slightly different standards, the conforming loan options offered are available from many 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 or Freddie Mac. Non-conforming loans break down into a few different categories.
Government loans are backed by the federal government. When we speak of these loans, mortgage lenders are referring to those created by the FHA, USDA and VA.
These loans each have their own benefits. For example, with an FHA loan, those with a sufficiently low debt-to-income ratio (DTI) can qualify with a median FICO® Score of 580 or higher. If you have a credit score of 620 or higher, you can often afford more home or take out more equity because you can qualify with a slightly higher DTI than you might be able to on similar conventional loans. You will also only need a 3.5% down payment.
Here’s much more on the guidelines and benefits of FHA loans.
USDA loans are intended for those in rural areas or on the outskirts of the suburbs. There are a couple of big benefits to a USDA loan.
- No down payment required
- Lower mortgage insurance than FHA
Quicken Loans requires everyone on the loan have a median FICO® Score of 640 to get a USDA loan. In addition to needing to be in a qualifying area, the USDA also states that your household income must be below 115% of the area median.
VA loans are available for eligible active-duty servicemembers, reservists, veterans and surviving spouses of those who passed in action or as a result of a service-connected disability. There are three major advantages to a VA loan:
- There’s no down payment required and with a 680 median FICO® Score, you can even convert all of your home value into cash
- Instead of mortgage insurance, there’s a one-time funding fee
- For those that qualify, these are often some of the best interest rates you can get
Other than service time requirements, the other thing to be aware of when getting a VA loan is your credit. Although the VA doesn’t set specific minimums, lenders may set their own policies. Quicken Loans requires a median FICO® Score of 620 for all clients on the loan.
Another common type of non-conforming loan 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 our starting point)
- Your lender may require additional documentation due to the size of the loan
Beyond government and jumbo, there are other types of nonconforming loans. These 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 derogatory credit item such as a recent bankruptcy, although they’ll likely have to pay a higher rate in order to compensate for the additional risk.
Lastly, a lender may offer a non-conforming loan in order to tailor a product for the benefit of clients who are well-qualified in order to meet their unique goals.
Benefits of Non-Conforming Loans
When it comes to non-conforming loans, there are 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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