Conforming vs. Non-Conforming Loans

Conforming vs. Non-Conforming Loans

We recently discussed conventional loans, which are loans that are not guaranteed or insured by a government agency. Conventional loans are often confused with “conforming loans” but these terms describe different characteristics of mortgage loans. Conventional loans can be conforming or non-conforming.

The Conforming Loan

In order for a mortgage loan to be conforming, it must meet certain criteria that would allow Fannie Mae and Freddie Mac to purchase the loan. The most significant of these criteria is the loan limit, which refers to the maximum amount of the loan. The loan limit can change from year to year. In most states in 2013, the conforming loan limit for a single-family, one-unit property is $417,000. Certain areas of the country, such as Alaska, Hawaii, the Virgin Islands and Guam, have a higher loan limit. Other criteria for conforming loans include standards for debt-to-income ratios and financial documentation that must be submitted by the borrower to support the loan.

The Benefits

Conforming loans offer borrowers some advantages. Most importantly, conforming loans typically have lower interest rates, which means lower monthly mortgage payments and less money spent over the life of the loan. Conforming loans often do not come with pre-payment penalties for paying off the mortgage sooner than expected, which can make refinancing down the road more attractive. And conforming loans are often processed by an automated underwriting system (AUS), making for a faster turnaround time.

The Non-Conforming Loan

There are a variety of reasons a loan may fail to meet the conforming loan criteria – from the loan amount itself (loans over the conforming loan limit are called “jumbo loans”) to the borrower's credit score, the LTV or the type of property. Non-conforming loans generally have less favorable terms than conforming loans because non-conforming loans cannot be sold to Fannie Mae or Freddie Mac, and the more difficult the loan is to sell on the secondary market, the less funds the lender may have available to make more loans. This risk is offset through generally higher interest rates, and greater upfront fees and insurance requirements than conforming loans.

So, Which Loan Option is Right for You?

As described above, the loan amount, your financial situation, the property type and a variety of other factors may dictate which loan type you qualify for. However, there are times when borrowers have a choice. Either way, it's very important to follow all the same best practices: comparison shop lenders to understand different programs, rates, fees and of course confirm lenders' quality.

To find out more information about the current loan limits and loan programs, contact PennyMac today at (888) 457-0047.