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Understanding Conforming and Nonconforming Loans

Tax Reform - California Homeowners - Opes Advisors

 

Shopping for a home? Trying to sell yours? Confused about the difference between conforming and non-conforming loans? We can help.

First things first

Buying a house should be exciting, not overwhelming. So, we’ve broken down the differences between two common types of loans. This information will help you understand the housing market and how it affects your buying or selling potential.

Conforming Loans

A conforming loan is a conventional mortgage loan that complies with the financing limits set by the Federal Housing Finance Agency (FHFA). A conforming loan “conforms” to the underwriting guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These are government-sponsored entities created to give people a fair opportunity to purchase a home without creating undue risk for taxpayers. Both Fannie Mae and Freddie Mac are legally obligated to buy conforming loans.

Conforming loans have a pre-determined limit decided by FHFA. And how’s this limit determined? Largely based on where you live.

So, what does a conforming loan offer for buyers?

  • It meets loan limits set by the FHFA
  • It’s currently capped between $484,350 and $726,525
  • Lower interest rates
  • Lower monthly mortgage payments
  • Less money spent over the life of your loan
  • Lower down payments
  • Lower credit scores accepted
  • Easier to qualify for than a conventional loan

Non-Conforming Loans

A non-conforming loan is sometimes called a “jumbo” loan. A jumbo loan’s limits exceed the conforming loan limits, letting you borrow more money towards a home. These are generally issued to higher-income earners and often require a larger minimum down payment. A non-conforming loan’s underwriting does not conform to Fannie Mae or Freddie Mac loan structures. Because these loans do not meet FHFA guidelines, they are not insured by Fannie Mae or Freddie Mac. And because they aren’t insured, they’re considered higher risk.

So, what does a non-conforming loan offer for buyers?

  • Does not have a specific loan cap
  • Allows buyers to purchase more expensive properties
  • Is not government-insured
  • Requires a larger down payment
  • Demands a very high credit score
  • Can be more difficult to qualify for

What factors determine conforming loan limits?

Conforming loan limits were established by the Housing Economic Recovery Act of 2008. The specific loan limit amount is determined by the FHFA House Price Index (HPI). For example, from Q3 2017 to Q4 2018, housing prices increased 6.9% on average, according to the FHFA 2018 House Price Index report. So, the maximum conforming loan limit was raised by the same amount in 2019, making it $484,350.

According to FHFA’s seasonally adjusted, expanded-data HPI, house prices increased 5.38 percent, on average, between the third quarters of 2018 and 2019.  Therefore, the baseline maximum conforming loan limit in 2020 will increase by the same percentage.  The 2020 maximum conforming loan limit for one-unit properties will be $510,400.

How do conforming loan limits affect you?

As a buyer, higher conforming loan limits mean you have an expanded pool of potential homes to purchase. The higher limit makes expensive homes more affordable for a broader range of potential buyers, giving you access to homes that may have been out of budget before.

As a seller, it’s good news when conforming loan amounts go up because it suggests government confidence in the housing market. It could make it easier for you to sell your home as it can make potential buyers more comfortable making a purchase. Plus, as limits go up, the pool of potential buyers increases as more homes become accessible.

 

View your county’s loan limits here.

 

We are here to help you when you are ready to start shopping for the right loan for your next home.

 

Not a commitment to lend. Programs available only to qualified borrowers. Programs subject to change without notice. Underwriting terms and conditions apply. Purchase and rate/term refinance. Primary residence only. Some restrictions may apply.

Opes Advisors, a Division of Flagstar Bank | Member FDIC | Equal Housing Lender