Understanding the Difference Between Conforming and Non-conforming Loans
There is nothing more fulfilling than making your dream home come true. Of course, a house can be your life’s most valuable asset. It is where you’ll most likely stay for good, start a family, and build your career. That’s why it is your goal to purchase a residential property.
However, a home purchase can be a headache. There are several considerations to make, from choosing the right property to navigating through the real estate process. On top of all these is seeking financing from a potential lender. That’s where a mortgage comes into the picture.
But as far as a mortgage is concerned, there are a handful of options to take. Know that it can get categorized as either conventional or non-conventional. Also, there are different loan types under each category. It can be hard to choose a loan best suited for your needs.
Let’s take a look at the differences between conforming and non-conforming loans. Keep reading to know what mortgage type to choose for your home purchase.
As the name suggests, conforming loans conform to the funding guidelines with a dollar limit set forth annually by the Federal Housing Finance Agency (FHFA). These general guidelines get established by the two largest mortgage buyers in the United States: Fannie Mae and Freddie Mac. These mortgage entities purchase mortgages from other lenders and generate more loans. Their goal is to offer mortgages to various people looking to buy a house.
The term ‘conforming’ and ‘conventional’ get used interchangeably. Sure, all conforming loans are conventional. However, not all conventional loans are conforming. Let’s take, for instance, the jumbo mortgage. This loan type falls under the conventional loan. But since it goes over the funding limits backed by Fannie Mae or Freddie Mac, it becomes non-conforming.
If you’re looking to get a mortgage, you can shop around and choose the best mortgage deal from a prospective lender. These private lenders are usually banks and other financial institutions strictly following the financing criteria. You can get a mortgage pre-approval based on your income source (employment or business), your credit score (minimum score of 620), debt-to-income ratio (around 36 percent and not over 43 percent), and down payment capability (usually 20 percent).
After finding a residential property and completing all your paperwork, the mortgage comes into play. From there, you must keep up with your monthly contractual payment (MCP) during the loan term until you pay off the loan.
On the other side of the spectrum, non-conforming loans do not follow the funding guidelines set forth by Fannie Mae and Freddie Mac. These include the jumbo loan as mentioned above and other government-backed loans. Take note of the following:
- Jumbo Loan: This mortgage goes above the Fannie Mae and Freddie Mac limits. Why? It helps finance expensive properties. As such, you’ll have to meet a strict qualification guideline and pay more for a jumbo loan compared to a conventional mortgage.
- FHA Loan: This mortgage gets backed by the Federal Housing Administration designed for low-to-moderate-income buyers. It also applies to those looking to purchase a house for the first time. As such, the borrowers usually have a down payment of 3.5 percent. If you cannot afford to meet the mortgage guidelines private lenders offer, taking out an FHA loan can be your best option.
- VA Loan: This mortgage falls under the Veterans Administration (VA) as a government-funded loan. This loan type gets offered to qualified military service members, veterans, and spouses. What’s good about this loan is that it has no down payment at all.
- USDA Loan: The US Department of Agriculture (USDA) backs this mortgage. This loan type specifically caters to low-income buyers in rural areas. Same as a VA loan, it requires no down payment as well.
Which Should You Choose?
Choosing between conforming and non-conforming mortgages can be challenging. However, the valuable pieces of information discussed above will help you arrive at an informed decision.
For the most part, a conforming loan can be your best option if you can meet the funding qualifications set by the federal agencies and afford to pay the private lender in the long run.
On the other hand, you can opt for a government-backed loan if you have financial considerations. For instance, if you’re in the military, better apply for a VA loan so that you’ll have no down payment at all.
At this point, you now know what mortgage type to choose for your home purchase. Consider the differences between conforming and non-conforming mortgages discussed above. Be sure to factor in your home choice, financial resources, and your family’s personal needs.
In addition, it’s best to hire and work with a real estate agent in your home-buying journey. They can help you shop around for mortgage offers and settle for the best deal from a highly reliable lender. In the end, you’ll be surprised at how you can make your dream home come true!