Checkout this video:
What is a Conforming Loan?
A conforming loan is a mortgage that meets the underwriting guidelines of government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac. Borrowers with conforming loans can typically make lower down payments than those with jumbo loans, and they have lower interest rates and less stringent credit requirements.
Conforming Loan Limits
Conforming loan limits are loan amounts that conform to the guidelines set forth by Freddie Mac and Fannie Mae. These two government-sponsored enterprises purchase mortgage loans from lending institutions, so that they can provide more money to the market for housing loans. In order to conform to Freddie Mac and Fannie Mae guidelines, a loan must not exceed a certain amount. This is known as the “conforming loan limit”. The conforming loan limit for a single-family home is $417,000.
Types of Conforming Loans
A conforming loan is a mortgage loan that meets the standards of loan guidelines established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Conforming loans are also called conventional loans.
There are two types of conforming loans: government-sponsored enterprise (GSE) loans and portfolio loans. GSE loans are backed by either Fannie Mae or Freddie Mac, and portfolio loans are held by banks or other financial institutions.
The main difference between conforming and non-conforming loans is that conforming loans meet the guidelines set by government-sponsored enterprises, while non-conforming loans do not. There are many other differences between the two, but that is the most fundamental one.
Advantages of a Conforming Loan
A conforming loan is a mortgage that is equal to or less than the dollar amount limit set by the Federal Housing Finance Agency (FHFA). Conforming loans are easier to qualify for because they have stricter guidelines including a minimum credit score, minimum down payment, and maximum debt-to-income ratio.
The main advantages of a conforming loan are:
-You may qualify for a lower interest rate because these loans pose less risk for the lender.
-They may be easier to refinance.
-They may be eligible for purchase by government-sponsored enterprises (GSEs), such as Freddie Mac and Fannie Mae. This can make it easier to sell your home in the future.
Disadvantages of a Conforming Loan
Conforming loans come with both advantages and disadvantages. Below, we outline some of the key pros and cons:
Pros of Conforming Loans:
– Lower interest rates. Because conforming loans are backed by Fannie Mae and Freddie Mac, they typically offer lower interest rates than non-conforming loans. This can save you money over the life of your loan.
– Easier to qualify for. Conforming loans tend to have more lenient credit requirements than non-conforming loans, making them easier to qualify for.
– Shorter interest rate lock period. When you’re shopping for a mortgage, you’ll likely be given a choice of lock periods. A shorter lock period (such as 15 days) means you’ll have a lower interest rate, but there’s more risk that rates could go up before you close on your loan. With a conforming loan, you can typically lock in your rate for 30 days.
Cons of Conforming Loans:
– Limited to Fannie Mae and Freddie Mac guidelines. Conforming loans must adhere to strict guidelines set by Fannie Mae and Freddie Mac. This can limit your loan options if you don’t fit neatly into their guidelines.
– Higher mortgage fees in some cases. Because conforming loans are backed by Fannie Mae and Freddie Mac, lenders may charge higher fees for these loans. This can offset any interest rate savings you may get from a lower rate
Who Qualifies for a Conforming Loan?
In order for a mortgage loan to be conforming, it must meet certain guidelines set forth by government-sponsored enterprises Freddie Mac and Fannie Mae. These enterprises purchase mortgages from lenders, bundle them together, and sell them as mortgage-backed securities to investors on the open market.
Conforming loans must adhere to certain guidelines in order to be purchased by Freddie Mac or Fannie Mae. The two government-sponsored enterprises (GSEs) are the largest buyers of mortgages in the US, so if a loan meets their criteria, it has a better chance of being sold and thus of being available at a lower interest rate.
The main criteria that a loan must meet in order to be conforming are:
-Loan amount: The loan must be for $453,100 or less for a single-family home ($ 580,150 or less for a two-unit home, $ 701,250 or less for a three-unit home, and $ 871,450 or less for a four-unit home). Higher loan amounts are known as jumbo loans.
-Down payment: You must have a down payment of at least 3%.
-Credit score: You must have a credit score of at least 620.
-Income and employment: You must have income that is sufficient to repay the loan and you must have been employed for at least two years.
How to Apply for a Conforming Loan
A conforming loan is a loan that meets the standards of loan guidelines established by government-sponsored enterprises Freddie Mac and Fannie Mae. The loan limits are the same for both GSEs. A conforming loan is also sometimes referred to as a conventional mortgage.
To get a conforming loan, you’ll generally need a credit score of 620 or higher, and if your score is below that mark, you might still be able to get approved if you have strong compensating factors like a large down payment or significant cash reserves. The minimum down payment for a conforming loan is typically 5%, although it can vary depending on the type of property (such as a single-family home versus a condominium).
In addition to meeting credit and down payment requirements, you’ll also need to have a debt-to-income ratio (DTI) that’s 80% or lower. Your DTI is calculated by taking your monthly debts (including housing expenses) and dividing it by your gross monthly income. If your DTI is too high, most lenders won’t approve your loan application.
If you’re interested in applying for a conforming loan, you can start the process by shopping around with different lenders to compare rates, terms, and fees. When you’re ready to apply, you’ll need to submit an application including information about your employment history, financial situation, and property details. Once your application has been reviewed and approved, the lender will order an appraisal of the property to determine its value and make sure it meets all applicable guidelines.
If everything goes smoothly, you should be able to close on your loan within 30-45 days from when you first applied.