Conforming vs. Non-conforming loans. What is the difference?

When it comes to mortgage loan terminology some first time home buyers may benefit from an introduction to terms they have never heard before. At times, this can feel a little overwhelming, especially when trying to decide which mortgage loan option is right for you. Conforming and non-conforming loans are two of those terms. The words themselves just hint at what the loan type could be, but we’re here to help clarify these terms to help you with your homeownership journey. Let’s break it down.

Conforming Loans

The biggest difference in conforming vs. non-conforming loans is usually the loan limits. Conforming loan limits for both Fannie Mae and Freddie Mac in most of the country for single family homes was recently raised to $424,100. This increase from $417,000 is the first increase to baseline loan limits since 2006. In higher cost areas, higher loan limits may apply. Conforming loan limits are set by the Federal Housing Finance Agency who oversees both Fannie Mae and Freddie Mac.

Conforming loans can be sold to Fannie Mae or Freddie Mac after the loan closes. In some cases this means that you may have a different lender service your mortgage. Check with your mortgage lender to find out their procedures after a loan is closed. Conforming loans are usually a lower risk to the lender because these loans are lesser in amount compared to non-conforming loans.

A knowledgeable mortgage lender can help you find the loan that is right for you.
A knowledgeable mortgage lender can help you find the loan that is right for you.

Non-conforming Loans

Non-conforming loans have several differences from a typical conforming loan. Non-conforming loans do not meet the criteria to be sold to Fannie Mae or Freddie Mac. It may be more likely that the lender will remain the same after the loan closes. The borrowers’ DTI (debt-to-income) ratio usually has to be lower than in a conforming loan. Your mortgage lender will be able to provide you with their acceptable guidelines for DTI ratios.

One of the most common types of non-conforming loans is also called a jumbo loan. A jumbo loan is a loan that exceeds the conforming loan monetary limits. However, non-conforming loans are not exclusively jumbo loans. Sometimes credit history issues and high DTI can cause a loan to become non-conforming.  Non-conforming loans may require additional documentation, sometimes due to the high amounts borrowed, and other times due to high DTI ratios, credit history issues or low credit scores. A non-conforming loan may require a higher down payment and interest rates may differ from a conforming loan, sometimes to the borrower’s benefit. If you think a jumbo loan may be right for you, here is more information on the benefits of a jumbo loan.

Because each loan type has different guidelines, it is important that your mortgage lender is knowledgeable. Work with someone who can explain the process and guide you from start to finish. Not all mortgage lenders are the same. We’ve created these helpful tips on how to choose a good mortgage lender.

For help finding the right mortgage loan for you, talk to the lending experts at Lenox/WesLend Financial, call 844-225-3669. As heard on the radio, it’s the biggest no-brainer in the history of mankind. 

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