April 6th, 2021 7:38 PM by Jackie A. Graves, President
Shopping for a mortgage? Now’s the time to familiarize yourself with one of the most popular types of home loans: a conforming loan. It’s the go-to mortgage for borrowers with solid credit and enough cash or home equity for a sizable down payment. In a marketplace with lots of mortgage options, a conforming loan is the standard, and a good place to start when looking for financing.
What is a conforming loan?
Conforming loan definition
A conforming loan is a mortgage eligible to be purchased by Fannie Mae and Freddie Mac, the government-sponsored enterprises, or GSEs, because it meets — or conforms — to their standards, including limits on the amount that can be borrowed.
The 2021 conforming loan limit for a single-family home is $548,250 in most housing markets. In higher-cost areas, the limit is $822,375. Here’s a breakdown of conforming loan limits by county.
A common example of a conforming loan is a mortgage with a 20 percent down payment, a 15- or 30-year term, monthly principal and interest payments, no prepayment penalty, no balloon payment and no private mortgage insurance.
What are conforming loan standards?
Fannie Mae and Freddie Mac buy conforming loans from mortgage lenders and package them together to create mortgage-backed securities (MBS), which are then sold to investors. By selling conforming loans to Fannie Mae and Freddie Mac, lenders can obtain new capital to fund additional mortgages.
As such, a mortgage has to adhere to certain standards in order to be considered conforming and eligible to be purchased by the enterprises. Mortgages that conform to Fannie Mae and Freddie Mac requirements are easy for investors to buy and sell because they meet these standards, which include:
A conforming loan can have a lower down payment as long as the borrower pays private mortgage insurance, or PMI. (In effect, you swap a big down payment for backing by a strong third party.) By paying for PMI, you can get a conforming loan with just 5 percent down in many cases, or as little as 3 percent down if you have a Conventional 97, Fannie Mae HomeReady or Freddie Mac Home Possible mortgage.
With a 20 percent down payment, however, there’s much more cushion for the lender if something goes wrong with repayment. In the event of a default, the lender can sell the home for as little as 80 percent of its value and still break even.
Because a bigger down payment reduces their risk, lenders are willing to accept a borrower with a credit score as low as 620 for a conforming loan — but with two important caveats:
To qualify for a conforming loan, lenders will also look to make sure you can afford your monthly mortgage payments by evaluating your debt ratios. There are two measures, sometimes expressed as 28/36:
It is possible to get a conforming loan with higher debt ratios, but lower is generally the better case for both borrower and lender.
One of the immovable standards for conforming loans is the loan limit — you can only borrow so much and no more. Loan limits are generally adjusted each year, with higher limits for properties with two, three and four units (as long as you live in one of the units).
Keep in mind that requirements can vary in other ways, as well. For example, standards might be stricter for a cash-out refinance than for a rate-and-term refinance.
What are the benefits of a conforming loan?
If you make at least a 20 percent down payment, that means there is less money for you to borrow and more home equity at the time you purchase your home. The result is that your monthly payments are lower compared to a loan with less money down.
What are the disadvantages of a conforming loan?
Conforming vs. non-conforming loans
Conforming vs. conventional loans
What are conforming loan rates?
You can find conforming loan rates through Bankrate, which provides mortgage rates for both 30-year and 15-year loans daily. When comparing mortgage rates, consider the following:
Tips for applying for a conforming loan
There are a number of steps you can take that can help you get the best conforming loan for your circumstances:
1. Check your credit report
As much in advance as possible — several months if doable — check your credit reports at AnnualCreditReport.com. Due to the coronavirus crisis, credit reports are now available at no charge on a weekly basis from Experian, Equifax and TransUnion through April 2021. Check your reports carefully for things such as out-of-date items and factual errors. Dispute any errors you spot, because even minor issues can result in a lower credit score.
2. Get your documents in order
Next, get your paperwork together so you’re prepared for the mortgage application process. Lenders can now get a lot of information directly from banks and the IRS, but it’s still a good idea to have documents like payroll stubs, bank statements, retirement accounts, W-2 forms and tax returns handy.
3. Get preapproved
Once you find a lender you’re interested in working with, you can get preapproved for a loan, which can help expedite the financing process and uncover any issues related to your credit before they show up when you formally apply for a mortgage. Getting preapproved can also help demonstrate to a home seller that you’re a serious buyer, which could give you an edge over others.
4. Avoid excessive spending
Lenders can check and re-check your credit report and score and various financial accounts right up until your mortgage closing date. Think of the time between when you apply for a loan and when you close as a “quiet” period, when you spend as little as possible. While your mortgage application is in process, don’t apply for any new credit, such as a credit card or personal loan, and avoid spending on things you don’t really need. This will help ensure the closing process goes smoothly and you receive the financing you are expecting.
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