When it comes to purchasing a home, there are various mortgage loans to consider. If you’re unsure about your choices, taking a closer look at a few of them may be beneficial.
The cost of the property you intend to buy might influence the mortgage you need. We get a lot of queries concerning the distinctions between conforming and non-conforming loans.
This article will run you through some things to consider before applying for a mortgage with us.
Understanding a Conforming Loan
A conforming loan is a home loan that adheres to the Federal Housing Finance Authority’s (FHFA) guidelines. The FHFA was established by the Housing and Economic Recovery Act (HERA) of 2008. This legislature was passed in response to the housing and financial crisis in 2007-2008.
Their goal is to make sure these organizations serve as a dependable source of liquidity and capital for the home finance sector throughout the economic cycle.
The FHFA sets restrictions for conforming loans, which are loans that adhere to Fannie Mae’s and Freddie Mac’s rules and criteria. The limits are changed every year according to a formula defined under HERA.
In 2021, the United States had a conforming loan maximum of $548,250. There are exceptions, however, for high-cost markets.
The Federal Housing Finance Agency defines a high-cost market as one where the local median house value exceeds 115 percent of the usual conforming limit.
Conforming loan limitations are based on the median house value in locations where exceptions exist. For 2021, the highest conforming loan limit is $822,375.
Understanding a Non-Conforming Loan
A non-conforming loan is one that does not meet Fannie Mae or Freddie Mac’s lending standards. In certain situations, a non-conforming loan is referred to as a jumbo loan or even a super jumbo loan.
Jumbo loans allow customers to purchase higher-priced houses since they offer more loan size flexibility than conforming loans.
When applying for a jumbo mortgage loan, the underwriting criteria are more restrictive than applying for a mortgage sponsored by Fannie Mae or Freddie Mac. This is because lenders that make non-conforming loans take on greater risk by lending higher sums.
The Challenges When Getting a Non-Conforming Loan
If the conforming loan limit is insufficient to fulfill your needs, you may want to go for a non-conforming loan. However, it’s critical to grasp the difficulties of non-conforming loans because the standards may differ from those of a conforming loan.
Here are some common challenges when getting non-conforming loans:
Variable Sources of Income: Jumbo loan applicants frequently rely on less traditional sources of income. Self-employment income, partnership income, stock options, and bonuses are just a few examples.
You should be prepared to provide financial documents, stock/mutual fund statements, or tax returns to prove these sources of income.
Verification of Cash Reserves: Financial liquidity is crucial for a jumbo loan. To fulfill cash reserve requirements, you should anticipate a lender to consider the part of your liquid assets that will remain after closing.
The goal is to assure the lender that you will be able to pay your mortgage even if you run into financial difficulties.
Strict Financial Metrics: FICO scores and debt-to-income ratios are two of the most frequent indicators to assess a borrower’s capacity to repay a home loan (DTI).
While FHA and VA loans require FICO scores as low as 500, jumbo lenders often seek higher scores.
Requiring Multiple Appraisals: Based on the appraised value of your house, your jumbo mortgage lender may want two appraisals of the property you intend to acquire.
Two assessments may be necessary for transactions above one million dollars. Requesting a second appraisal should provide you and your lender peace of mind that you are not overpaying for your house.
Conforming and non-conforming loans both have advantages and disadvantages. Before you start the mortgage application process, educate yourself on the variations and be prepared to evaluate rates and perks before purchasing a property.
Are you looking for a mortgage in Colorado Springs? Total Lending Concepts offers home loans to fit every situation. Contact us to learn more!