Conforming Loans
Each year, millions of Americans apply for a new or second mortgage, or even a mortgage refinance, to obtain lower mortgage rates. While searching for the right type of home loan, it is extremely beneficial for borrowers to familiarize themselves with all the different home mortgages available and to understand the distinction between conforming and non-conforming loans.
Conventional loans come in two forms - conforming and non-conforming. Most loans in the United States are conforming loans. Brokers usually refer to conforming loans as A-paper loans for A borrowers. Each year, quasi-governmental agencies Fannie Mae and Freddie Mac, through its Federal regulatory body known as The Office of Federal Housing Enterprise Oversight (OFHEO), establish the conforming loan limit. Conforming loans are defined as mortgages that are equivalent to or less than the dollar figure set by the conforming loan limit and that meet Freddie Mac and Fannie Mae's funding requirements. OFHEO's regulatory oversight is aimed at ensuring that these two stockholder-owned corporations accomplish their missions of making homeownership accessible to and a reality for middle-class and lower-income Americans. The OFHEO adjusts the conforming loan for the following year by relying on the October to October percentage change in mean housing prices reported by the Federal Housing Finance Board (FHFB).
The agencies' guidelines set forth the income and borrower credit requirements, down payment, maximum loan sum, and eligible properties. Cooperating mortgage lenders that comply with those guidelines are authorized to sell their loans on the secondary mortgage market to Freddie Mac or Fannie Mae, which in turn packages them into securities and then sells them to investors. This process generates a constant supply of affordable funds for real estate financing and makes conforming loans available to consumers. Mortgage lenders engaged in the resale may continue servicing the loans so that consumers can have the convenience of making payments to the original creditor.
Conforming loans share a number of characteristics in common, including the following:
- They offer the most competitive interest rates for home financing
- They are easier to sell to investors
- They require borrowers to meet stricter eligibility requirements.
Freddie Mac and Fannie Mae also determine which type of property may qualify as collateral for conforming loans. If the property securing the mortgage is 1) a single family home, 2) a 2, 3, or 4 family residence, 3) a cooperative, 4) a Planned Unit Development or 5) a condominium, the loan qualifies for delivery to the two agencies and is considered to be a conforming loan.
Mortgages for an amount exceeding the conforming loan limit are known as non-conforming or jumbo mortgages. Some of the reasons why jumbo non-conforming loans do not meet the funding criteria are as follows:
- A loan amount that exceeds the mortgage loan's conforming loan limit,
- A deficiency in sufficient credit,
- The unconventional nature of the use of loan funds, or
- The collateral that is pledged.
Non-conforming loans fall into one of two categories - subprime or B-paper loans. Examples of non-conforming loans include loans that are secured by residential real estate containing a commercial unit (i.e. mixed-use) and properties composed of more than four units.
To qualify as a jumbo mortgage, the loan amount must be higher than the industry standard set by Freddie Mac and Fannie Mae for conventional conforming loan ceilings. Jumbo loans have slightly higher interest rates than conforming loans, due to the fact that they are purchased and sold to a lesser extent. However, the difference in mortgage rates between the two types of loans varies depending on the economy. The average loan rates on jumbo mortgages will change according to the mortgage amount and the type of real estate property in question. Generally-speaking, conforming loans have interest rates that are 1/4 to 1/2 percent lower than jumbo mortgages offered by the same mortgage lender.
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