BlogFinancial IQ September 24 2020

Conforming vs. Nonconforming Loans

Congratulations! Making the decision to buy a brand new home is an amazing feeling. When financing your new home, there are just a few things you need to know about the types of loans you might be choosing from.

What is a Conforming Loan?

First, some terms:

Fannie Mae, a.k.a. the Federal National Mortgage Association, and Freddie Mac, a.k.a. the Federal Home Mortgage Corporation, are government-sponsored loan companies created by Congress to provide liquidity, stability, and affordability to the mortgage market by providing access to funds to the banks, savings and loans, and mortgage companies that make loans to finance housing.

A conforming loan is a mortgage loan that can be sold to Fannie Mae or Freddie Mac, and that is equal to or less than the amount of the limits set by the Federal Housing Finance Agency. In the simplest terms: They conform to FHFA limits.

The only catch: There is a limit on how much you can borrow. The conforming loan limit for 2020 is $510,400 (it can be more in certain more-expensive housing markets). These limits are adjusted annually to reflect the change in the price of the average U.S. home.

Pros:

  • Easier to qualify for
  • Typically has a lower interest rate
  • Less scrutiny of your credit score

Cons:

  • Loans are limited to $510,400

What is a Non-Conforming Loan?

A non-conforming or jumbo loan is simply a loan that doesn’t meet the criteria established by Fannie Mae or Freddie Mac. The terms and conditions can vary greatly between lenders and may also be dependent on factors like your debt-to-income ratio and credit score. Because these loans are considered riskier for lenders, there is often a higher interest rate.

Pros:

  • A good choice for borrowers who may have lower credit scores
  • Can allow for a greater loan amount than the annual limits

Cons:

  • A nonconforming loan may be harder to obtain
  • Higher interest rate

Eagle Home Mortgage offers a range of lending options, from conforming and jumbo to FHA and VA loans. Not sure which loan is right for you? One of our lending specialists would be happy to help! Click here to find an expert near you.

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