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Understanding Conforming and Non-conforming Lending

With the housing market ever-changing, many new home buyers are not sure what terms like “conforming” and “non-conforming” mean. This blog post will explain what the difference between conforming and non-conforming lending is, so you can make an informed decision when it comes to your mortgage loan.

What is Conforming?

Conforming loans are those that meet the requirements of Fannie Mae and Freddie Mac. These two government-sponsored entities buy mortgages from lenders and package them into securities. In order for a loan to be considered conforming, it must adhere to the following guidelines set by Fannie Mae and Freddie Mac:

  • The loan amount must be below $510,400 (or $765,600 in high cost areas)
  • The loan must have a maximum debt-to-income ratio of 45%
  • The borrower must have a good credit score (generally 700+)
  • The loan must be for a single family residence or 1 unit investment property
  • The borrower must provide adequate documentation regarding their income and assets

For most borrowers, conforming loans offer lower interest rates than non-conforming loans due to their higher credit limits and lower risk for lenders. Additionally, since these loans conform to Fannie Mae or Freddie Mac guidelines, they tend to have fewer restrictions on the type of property that can be financed.

What is Non-Conforming?

Non-conforming loans are those that do not meet the requirements of Fannie Mae or Freddie Mac. These types of loans often carry higher interest rates than conforming loans due to their riskier nature. Generally speaking, non-conforming loans are more flexible when it comes to underwriting criteria as they do not need to adhere to certain guidelines set by Fannie Mae or Freddie Mac. They may also require larger down payments than conforming loans as well as different documentation such as tax returns, bank statements, etc. Examples of non-conforming loans include jumbo loans (loans over $510,400), subprime mortgage loans (loans with credit scores below 600), or adjustable rate mortgages (ARMs).

No matter which type of mortgage you choose—a conforming loan or a non-conforming loan—it’s important that you understand what each one entails before committing to one particular option. Depending on your individual situation and goals, one option may better suit you than another; understanding how each works will help you make an informed decision about which type of mortgage is right for you. Contact us today if you have any questions about your home financing options! We can help guide you through the process so that you can make the best decision for your unique needs.