Conforming vs Non-Conforming Mortgage Loans

Conforming vs Non-Conforming Mortgage Loans

There’s a lot of unfamiliar, and often confusing, vocabulary in the mortgage process, and it’s important to know your terminology.

If you’re looking to buy or refinance a home, it’s important to understand mortgage terms that may be used. What’s the difference between a conforming and a non-conforming loan? What are the benefits of each?

What is a Conforming Loan?

A conforming loan is a loan that meets the requirements so that it can be sold to Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), USDA (Rural Housing Development), or the Department of Veterans Affairs (VA). To understand who these companies are, let’s take a step back.

Sometimes mortgage lenders or banks may hold on to your loan for 15 or 30 years, depending on your loan term. They make the money back every month when they collect your payments. This isn’t very common though.

What usually happens is that your Utah mortgage loan is sold to one of the major mortgage investors, mentioned above, within days of the closing. This allows lenders to have 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 choose to service your loan. Often companies will sell your mortgage to one of the investors and then sell the servicing rights to another servicing company.

The rules for Fannie Mae and Freddie Mac are set by the Federal Housing Finance Agency (FHFA), and the FHA, VA, and USDA have some of their own policies.

Loan Limits

The first big difference between a conforming and a non-conforming loan is the loan limits.

On an FHA loan, the loan limit varies by county and often changes annually. The limits on conventional and VA loans are the same as the national maximum amount for FHA, except that they are generally flat nationwide.

Higher limits apply in high-cost counties. In these counties, you can get a high-balance mortgage up to the county limit. In no instance will the mortgage amount you can get be higher than this limit set on a conforming loan.

Anything above county limits is considered a jumbo loan. Jumbo mortgage 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 a non-conforming category.

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Conforming Loan Guidelines

In addition to the loan limit restrictions, you have to meet certain other requirements in order to get a conforming loan.

You have to meet the credit guidelines of the agency that’s buying the loan. For conventional loans, Fannie Mae and Freddie Mac accept a median FICO® Score of 620 or higher. With an FHA loan, you can purchase a home or do a rate/term refinance with a median credit score as low as 580. A cash-out refinance under FHA will require a 620 credit score. At higher credit scores, you may be able to have a slightly higher debt-to-income ratio (DTI), which will allow you to afford a higher monthly payment.

Although USDA and VA loans don’t have prescribed minimum credit score requirements, mortgage brokers in Utah may set their own policies.

There are also items such as property guidelines and income restrictions that impact whether or not you qualify for certain loans. Contact one of Advanced Funding's Utah Mortgage Brokers for a more detailed list of requirements and limits of a conforming mortgage loan.

Benefits of Conforming Loans

Conforming loans have pretty well-defined guidance and because of that, the risk factors for various loans are well understood. There are a number of programs catering to different types of buyers. While lenders will have slightly different standards, the conforming loan options offered are available from a number of different companies, so you can really shop around for a broker who you’re comfortable with and who can match you with the right loan option to meet your goals.

Although these are general statements and every situation is different, the following are the benefits of conforming loans.

  • For loans with standard limits, you may be able to get a lower rate than you could with a non-conforming loan.

  • Although there’s some variation, the qualification standards are pretty well defined across lenders.

What is a Non-Conforming Loan?

Non-conforming loans are loans that aren’t bought by Fannie Mae, Freddie Mac, FHA, USDA, or VA.

One of the more common types of non-conforming loans is a jumbo loan, which comes with higher loan limits.

The good news is they typically come with similar rates to any other loan. There are just a couple of things you need to know.

  • Your DTI usually needs to be lower than it would be on a regular loan.

  • Your lender may require additional documentation due to the size of the loan.

Although jumbo loans are the most common type of non-conforming loan, there are other types as well, which may enable someone to buy a piece of property that they otherwise couldn’t with a conforming loan. Sometimes a non-conforming loan may help someone with a derogatory credit line such as a recent bankruptcy, although they’ll likely have to pay a higher rate in order to compensate for the additional risk.

Benefits of Non-Conforming Loans

When it comes to non-conforming loans, there are really three big benefits:

  • Higher loan amounts are available in the case of jumbo loans.

  • Depending on the loan option, you might be able to buy different types of property than you could with a standard conforming loan.

  • You might be able to get a non-conforming loan if you have a negative mark on your credit like a recent bankruptcy.

  • Possibly use alternative income documentation, such as bank statements.

Are you ready to buy a home or refinance your existing one? You can get started online. One of our Mortgage Loan Advisors would also be happy to speak with you at (801) 272-0600.