The decision to conform to some societal standard is often a contentious issue. With mortgages, it is purely an issue related to the amount you want to borrow.
To Conform or Not Conform With Mortgages
The first time you step into the ring of the home loan industry, you are apt to be overwhelmed with all kinds of jargon. From points to FICO scores, the new terminology can be a bit overwhelming. In the last twenty years, the terminology has become even more overblown with the creation of a few hundred different types of loans. In this article, we cover the fairly basic subject of conforming loans.
To conform or not to conform, is that the question? With most things, this is a voluntary choice. When it comes to mortgages, however, it is not. The term conforming refers instead to the type of loan you are going to seek based on a number of factors of which the amount borrowed is the most important.
A conforming loan is a loan that falls within the borrowing limits set out by various quasi-governmental agencies such as Fannie Mae and Freddie Mac. Both of these entities are charged with facilitating homeownership for low to moderate income Americans. They do this buy guaranteeing or buying mortgages from lenders who work with the relevant income profile people. Essentially, they significantly limit or eliminate the risk for the lender.
Given their mission, it is hardly a surprise that Fannie Mae and Freddie Mac have caps on the loans they will work with. They are charged with creating a loan market for low and middle income individuals, not wealthy or upper class people. As a result, conforming loans are those where the amount borrowed is no more than a particular amount. Generally speaking, this cap is about $300,000 as of the writing of this article, but changes from time to time.
In many parts of the country, $300,000 is not going to get you much in the way of a home. When it is time to borrow more, you are moving into the field of non-conforming loans. These are also known as “jumbo loans.” They refer to the fact that you must borrow more than the government supports and are thus entering the field of private financing. Non-conforming loans come in all shapes and sizes, but are generally a bit more difficult to qualify for than conforming loans. You can expect to pay a bigger down payment and the lender will be pickier since it is taking all of the risk without any real government assistance.
So, what does all this mean if you are considering buying a home? In all honesty, it does not mean much. You should buy the house you want and can afford irrespective of whether it requires a conforming or non-conforming loan.
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Dan Lewis is with Great Western Mortgage - providing California bad credit mortgage solutions.
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