Conforming loans are considered to be conventional loans, as opposed to jumbo loans, which exceed the maximum loan limits established by Fannie Mae and Freddie Mac. Conforming loans typically have lower interest rates than non-conforming loans since they carry less risk for lenders.
In general, this type of loan is used to purchase or refinance a single-family home. However, some lenders may also offer a conforming loan for the purchase of a duplex (or a multifamily structure). To qualify, a borrower must have a good credit rating, sufficient income, and a debt-to-income ratio that does not exceed certain limits. Mortgage insurance may also be required.
Understanding the Difference between Conforming and Non-conforming Loans
The first step in understanding conforming loans is to know the difference between a conforming loan and a non-conforming loan. Non-conforming loans are loans that exceed the maximum loan limit set by Fannie Mae and Freddie Mac. These types of loans generally require private mortgage insurance (PMI) due to the increased risk associated with them. They are also known as "jumbo loans" because of their higher loan amounts.
Conforming loans, on the other hand, adhere to the guidelines and standards set forth by the GSEs. This means that the loan satisfies the criteria set by both Fannie Mae and Freddie Mac, which includes a maximum loan amount, usually ranging from $417,000 up to $721,750.
Benefits of Conforming Loans
Conforming loans offer several distinct benefits when compared to non-conforming loans. The primary benefit is that interest rates for these types of loans are usually much lower than those of non-conforming loans. This is because conforming loans involve less risk of default for the lender and are more likely to be paid back on time.
Additionally, conforming loans require less paperwork than non-conforming loans, which can help speed up the approval process. Finally, conforming loans are more widely available than non-conforming loans, meaning that borrowers have access to more lenders and more competitive rates.
Summary:
A conforming loan is a type of loan that meets the specific guidelines and standards set forth by Fannie Mae and Freddie Mac, two government-sponsored enterprises. These types of loans are considered to be conventional, as opposed to jumbo loans which exceed the maximum loan limits established by Fannie Mae and Freddie Mac. Conforming loans typically have lower interest rates than non-conforming loans due to the lower risk involved. This type of loan is generally used to purchase or refinance a single-family home, although some lenders may also offer conforming loans for the purchase of a duplex or multifamily structure. To qualify for a conforming loan, a borrower must have a good credit rating, sufficient income, and a debt-to-income ratio that does not exceed certain limits. Mortgage insurance may also be required.
Conforming loans offer several distinct benefits when compared to non-conforming loans. These include lower interest rates due to the lower risk, less paperwork, and easier availability with more lenders and more competitive rates. In general, conforming loans are a great option for those looking to purchase or refinance a single-family home.
This article was contributed on Nov 18, 2023
