Conforming mortgage

What is a conforming mortgage?

A conforming mortgage is a one that follows the guidelines of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages on the secondary market and package them as mortgage-backed securities. Once banks sell their mortgages to Fannie and Freddie, they in turn lend more money to homebuyers from the proceeds.

Deeper definition

For Fannie and Freddie to buy or guarantee a mortgage, the loan must meet certain requirements. Those requirements include the borrower’s loan-to-value ratio, debt-to-income ratio and credit score.

Even so, the most important guideline is the limit on the size of the loan, an amount reset late last year by the Federal Housing Finance Agency, which regulates Fannie and Freddie. It was the first time the conforming loan limit was changed since 2006.

As of November 2016, the mortgage limit for a typical home is $424,100. Still, the agency allows a larger maximum mortgage in areas with a high cost of living. Those mortgages that exceed the limit set for that particular area are called jumbo loans.

Unlike conforming loans, Fannie and Freddie can’t buy nonconforming loans. In addition to jumbo loans, nonconforming loans include:

  • Negative amortization mortgages — Loans in which the payment is less than the interest due.
  • Subprime mortgages — Home loans offered to borrowers with a poor credit history.
  • No documentation mortgages — Loans for which the borrower doesn’t have to provide proof of income, assets or employment.

The inability to sell these loans on the secondary mortgage market is one reason that they’re more risky for lenders. As such, nonconforming loans usually come with higher interest rates and fees than conforming loans.

Conforming mortgage example

Liza and John want to buy a house that costs $450,000. That puts them over the conforming mortgage limit. They decide to make a down payment of $30,000, bringing their total cost below the $424,000 limit. As a result, they are eligible for lower fees and interest rates.

Ready to buy a home? Run the numbers and see how much your down payment should be.

 

Other Mortgages Terms

Guaranteed mortgage

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Shared appreciation mortgage

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Home Keeper

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Life cap

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