#MayMortgageTalks: Conforming Vs. Nonconforming Loans: What’s the Difference?
“To conform or not to conform’ that is a mortgage question” Back in 11th grade English class, you probably took weekly vocabulary quizzes. There were likely some very unfamiliar words on those quizzes and if you didn’t really study, like some of us, you may not have done so well.
There’s also a lot of unfamiliar vocabulary in the home mortgage business, and it’s important to know your terminology. For example, construction of the Batcave was probably too expensive for Bruce Wayne to get what the mortgage industry calls a conforming loan. Development of the community of Wakanda from the movie Black Panther was also too expensive for T’Challa’s ancestors to get a conforming mortgage.
So, what’s the difference between a conforming and a nonconforming loan? The type of loan determines who will receive your payments, maximum amount you can borrow and whether your loan is insured by a government entity or not. Read more below and talk with your lender until you have a good understanding of these terms.
When you get a mortgage, sometimes banks hold on to your loan for 15 or 30 years, depending on your loan term. They make the money they loaned you 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 Fannie Mae, Freddie Mac or Federal Housing Administration (FHA) within days of the closing. This allows lenders to recoup the cash they loaned you giving them 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.
The rules for Fannie Mae and Freddie Mac are set by the Federal Housing Finance Agency (FHFA), and the FHA has some of its own policies.
The first big difference between a conforming and a nonconforming loan is the loan’s limits.
On an FHA loan, the loan limit varies by county. The maximum amount on a regular loan for a single-family property is $417,000 in the lower 48 states. It’s $625,500 for Alaska and Hawaii.
The limits on the maximum amount for conventional loans are generally the same as the national maximum amount for FHA. Higher loan maximums apply in 39 high-cost counties around the country. In these counties, buyers can get a high-balance mortgage up to the county limit.
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, Freddie Mac, FHA and VA and pushes into nonconforming territory. Check with your lender for Jumbo loan facts.
Nonconforming loans are loans that are not purchased by Fannie Mae, Freddie Mac, FHA or VA. The reason is typically higher loan limits and the major investors don’t purchase these bigger loans. The good news is nonconforming loans typically come with similar interest rates to any other loan. There are just a couple of things you need to know.
Your debt-to-income (DTI) ratio has to be a lower than it would be on a regular loan (43% is a good guideline). Your lender may require additional documentation due to the size of the nonconforming loan. As always, talk to your lender regarding specific requirements.
This article was written by Kevin Graham of Quicken Loans, June 16, 2016.