While buying a new home can be a thrilling and fulfilling experience, there are some typical challenges associated with it that can be frustrating. The challenges include finding a suitable location, selecting the right estate agent, and choosing the right kind of loan, among others.
When selecting the most suitable mortgage, you may come across terms like conforming and non-conforming loans that can get confusing. This adds another level of complication to the home-buying process. In this blog, we will try to demystify these terms for you to help you make a better decision while applying for a housing loan.
What Is A Conforming Loan?
In simple terms, this loan is so-called since it conforms to the guidelines set by Fannie Mae and Freddie Mac. As lenders have the option of offloading the mortgage they give to you and the risk of default associated with it by selling it to Fannie Mae and Freddie Mac, conforming loans often come with low-interest rates. Many buyers prefer conforming loans to get this advantage.
The requirements for a conforming loan include:
- A minimum credit score of 620
- The maximum loan limit is $548, 250 in most areas, but may be higher in some areas with high cost of living
- The maximum debt-to-income ratio is 43%
- The minimum down payment required is 3%, though you may have to pay for private mortgage insurance in some cases.
Benefits of Acquiring a Conforming Loan
You derive these advantages when you apply for a conforming loan:
1. Lower interest rates
These loans offer lower interest to borrowers who have high credit scores. This makes them a good option for those who seek low monthly payments.
2. Consumer protection
Standardized guidelines and forms have been laid down for conforming loans that are aimed at protecting borrowers and lenders from poor lending practices.
3. Less strict loan requirements
Qualifying for a conforming loan is easier than non-conforming loans, with lenders requiring only a minimum credit score of 620.
Cons of Conforming Loans
1. Lower borrowing limit
There is a cap of $766,550 for single-unit properties with a limit extension at specific high-priced areas.
2. Private mortgage insurance
Though you may qualify for a minimum downpayment of only 3%, you may have to pay private mortgage insurance.
What Is A Non-Conforming Loan?
In contrast to conforming loans, non-conforming loans do not conform with the Fannie Mae and Freddie Mac guidelines. These loans include Jumbo loans that cross the limits laid down by Fannie Mae and Freddie Mac.
Requirements for non-conforming loans
When applying for non-conforming loans, the requirements depend on the type of loan you apply for and your lender. In general, these are the requirements:
- You require a minimum credit score of 580
- The maximum debt-to-income varies as per the program and lender
- The downpayment also varies for each loan, but you may most likely have to shell out a payment of at least 20%
Benefits of non-conforming loans
When opting for a non-conforming loan, you get these advantages:
1. Larger loan limits
If you want to buy an expensive property, you have to choose a non-conforming loan that provides access to higher loan amounts than conforming loans.
2. Flexible verification of income
Income verification is done in many non-traditional ways, considering bank statements and other documents that are proof of your income, making it a better option for self-employed individuals and those who receive seasonal commissions.
3. More buying options
Non-conforming loans give a broader range of properties to choose from, including non-warrantable condos, multi-unit condos, and even a condo that may presently be in litigation.
Cons of non-conforming loans
Despite their advantages, non-conforming loans come with some drawbacks:
1. Fewer options
Due to the greater risk associated with non-conforming loans, you may have only fewer lenders to choose from.
2. Possibility of foreclosure
The higher interest rates or adjustable rates often lead to a higher risk of foreclosure since these loans turn out to be costlier than expected.
Choosing between Conforming and Non-conforming Loans
Both conforming and non-conforming loans offer unique advantages, while they are also accompanied by certain shortcomings. Whether to choose a conforming or non-conforming loan is a personal decision considering factors like income stream, job stability, your affordability to pay monthly payments, or how long you plan to stay in your home.
Conclusion
Selecting the right loan between conforming and non-conforming loans can be daunting, especially if you are a first-time home buyer. At Bond Street, our experts will help you make an appropriate decision based on your present financial situation and your preferences.
We will identify the loan you are most qualified for and make a recommendation, ensuring that you meet your present and future financial goals.
Meet us today for a personalized consultation and expert guidance to find the best loan for you!
