In November of last year, the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac are raising the conforming loan limits to $510,400. 2020 is the fourth year in a row that conforming loan limits have been increased. But, between 2006-2016, the FHFA did not raise those limits at all. So, what is a conforming loan and how does this change affect you if you plan to purchase a home at Possum Kingdom Lake? Below, I have broken down the difference between conforming and nonconforming loans to help understand what choices you may have when choosing how to finance your home. However, your best bet is to contact a professional lender to understand what kind of loan best suits your needs and limitations when you are preparing to purchase a home.
What is a Conforming loan?
A conforming loan meets the underwriting guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored entities that purchase conforming loans. These “behind the scenes” mortgage lenders offer a secondary market for mortgages, which allow the lenders to package the loans into investment bundles. When a lender sells the conforming loan to Fannie Mae or Freddie Mac, they can keep a steady cash flow to offer more mortgages choices to more home buyers.
Guidelines of Conforming Loans
To receive a conforming loan, you must have a conventional loan, which differs from government-backed loans which I will explain in a bit. The first guidelines that must be met is a loan limit (generally at or below $510,400 as of 2020). But, limits can vary in some cities and states based on home prices. Secondly, your FICO score needs to be at least 620. There may be a few other qualifications but these are two of the main ones. Individual lenders may have the ability to set their own standards, but, in general, most conforming loans have similar criteria that they follow.
Benefits of conforming loans
* Conforming loans are less risky for mortgage lenders because they can sell them to Fannie Mae or Freddie Mac. Because of this, lenders can offer more of these as choices. A conforming loan may also provide more flexibility for you as the buyer.
* As a consumer with a high FICO score and low debt to income ratio and a substantial amount to put down on a house purchase (10-20%) you will more than likely qualify for a conventional loan, which is a type of conforming loan.
What is a Nonconforming Loan?
A nonconforming loan is offered when the mortgage doesn’t meet the guidelines set forth by the FHFA for Fannie and Freddies to purchase. Several reasons that it might not “conform” is that the loan amount is too large ( a jumbo loan), your FICO score and debt to income ratio doesn’t meet the qualifications, or you don’t have a substantial amount to put down as down payment.
Types of Nonconforming Loans
Unlike conforming loans, which has to be a conventional loan, there are a few different types of nonconforming (non-government-backed) loans available. A government-backed loan is a loan insured by the federal government which helps to cover the cost of the loan if a buyer defaults on mortgage payments. Therefore, government back loans are viewed as less risky for lenders than conforming loans. There are three types and each one has its own guidelines to follow to approve a potential home buyer.
1) FHA Loans – Extremely popular with first-time homebuyers, FHA loans allow applicants to buy a home with as little as 3.5%down. It is required to have at least a 580 credit score and a low debt-to-income ratio. Some lenders may qualify a lower credit score with a down payment on 10%, making you a less risky client. FHA loans are insured by the Federal Housing Administration (FHA).
2) VA Loans – VA loans are for qualified members of the armed forces, veterans, and their spouses. If you qualify for a VA loan, there is no down payment; however, there are still closing costs needed, and lenders set their guidelines when it comes to a minimum credit score. Since VA loans are designed for service members and their spouses, these loans are insured by the Department of Veteran Affairs.
3) USDA Loans – USDA loans are loans for buyers who want to purchase a home in typically in a rural area. Your home choice must be in an area that the USDA deems to be sufficiently rural. USDA loans are available with no down payment and lenders can set their credit score minimum. The US Dept of Agriculture insures USDA loans.
Benefits of Nonconforming Loans
1) Lower down payment required
2) Lower credit – customized loan solutions are available by lenders to give those with negative marks on their credit the opportunity to purchase a home.
3) More property types available- A nonconforming loan may allow you to buy a property that is not available with conforming loan parameters.
4) Higher loan limits- If you want to purchase a property that exceeds the current conforming loan limit, you may be limited in your options.
I have several recommendations for loan officers if you would like to contact me with what area you are trying to purchase in so that I can best guide you to a lender familiar with that area. Secondary properties in rural and lake areas present different challenges for loans that those primary properties in suburban areas.