Conforming vs. Non-Conforming Loans Explained
August 5, 2019
Conforming loans meet the rules set by Fannie Mae and Freddie Mac, while non-conforming loans do not. Fannie Mae and Freddie Mac are set by the Federal Housing Finance Agency (FHFA) to help make housing affordable for Americans.
Before applying for a mortgage loan, you should know the differences between conforming and non-conforming loans and the terms and conditions. Let’s explore these loans in more detail.
What is a Conforming Loan?
Conforming loans are referred to as conventional loans. They meet the guidelines set by Fannie Mae and Freddie Mac which allows loans to be packaged together and sold as an investment bundle. These loans conform, or fall under a certain limit.
The limits for conforming loans change every year by state and city. The limit is based on the state and city. The conforming loan limit for 2019 is $484,350. However, in higher-cost cities such as Washington DC and cities in California, this limit is $726,525.
- Limit changes every year, by state and city
- Lower down payments
- Lower interest rates
- Lower credit scores accepted
If you want to apply for a conforming loan, it’s a good idea to find out what the conforming loan limit in your area is. Once you figure out the limit, you can start shopping for a house within that price range. You can’t get a conforming loan if your home amount is higher than your area’s conforming loan limit, unless you pay for the rest with your own cash.
Benefits of Conforming Loans
There are many benefits to conforming loans:
- Easier to qualify for than conventional loans
- Usually don’t require a high down payment, which can be helpful for those who haven’t been able to save for one but still want a mortgage
- Sometimes have a lower interest rate, which can save you money
- Homebuyers usually only need a minimum of 620 credit score to qualify
Some conventional mortgage lenders like banks and credit unions may not be as likely consider applicants with a credit score this low.
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What is a Non-Conforming Loan?
Non-conforming loans are referred to as unconventional loans and don’t meet the requirements set by Fannie Mae and Freddie Mac since they’re above the conforming limit.
There are stricter guidelines to qualify for non-conforming loans. Lenders usually want to see that you have better credit score so that you’re not as much of a risk. You may also face stricter requirements for your debt-to-income ratio as well.
There are a few types of non-conforming loans:
- Government loans: Backed by the federal government. Mortgage lenders refer to those created by the FHA, USDA and VA.
- Jumbo loans: Comes with higher loan limits. Your debt-to-income ratio needs to be lower and the lender may require additional documentation.
The rates, term and conditions of non-conforming loans differ from lender to lender. Non-conforming loans tend to be riskier for the lender, since they’re lending more money to homebuyers.
Because these loans tend to be a higher risk, most lenders will want a down payment. You may not necessarily need 20% – it may only be 10% depending on your credit score and the lender’s requirements.
- Differ from lender to lender
- Down payment is higher
- Higher loan amounts available
- More options for buying property
Benefits of Non-Conforming Loans
Some benefits to non-conforming loans:
- There are no non-conforming loan limits, the maximum loan amount is decided by the lender
- More options for buying different types of property than you could with a standard conforming loan
- If you have a negative credit history (like a bankruptcy), you can still get accepted
With this type of loan, lenders do accommodate homebuyers with different needs. Non-conforming loans help people buy property that they wouldn’t be able to with a conforming loan.
How to Get a Mortgage Loan With Bad Credit
If you have bad credit and want to get a mortgage, your best bet is a conforming loan. Conforming loans are easier to get with bad credit because Fannie Mae, Freddie Mac, and other government-run housing departments aren’t as strict about credit scores as lenders who provide non-conforming loans. Because Fannie Mae and Freddie Mac sell your loan off to other lenders, you have a greater chance of being accepted.
If your credit score isn’t quite to a 620, another option is an FHA loan. The FHA is also backed by the United States government. The FHA requires a minimum credit score of 580, but you do need a 3.5% down payment to qualify.
Mortgage loan options if you have bad credit:
- Conforming loan – minimum credit score: 620
- FHA loan – minimum credit score: 580
If you have bad credit and want the best deal possible on a mortgage, there are a few options.
- Find a cosigner: A cosigner with good credit can help you meet the lender’s credit score requirement. A cosigner may not only help you qualify but also help you get a better interest rate. They should have a good credit score and be someone you trust.
- Go through your credit reports: Request your free annual credit reports. If there are any errors on your reports, you can dispute them. If you’re successful in getting them removed, this can help improve your credit score and improve your chances of qualifying for a mortgage loan or a better interest rate.
The higher your credit score, the more likely you are to qualify for a loan. Remember it takes time to fix your credit, so give yourself time before applying for a mortgage loan to do this.
When you’re applying for a mortgage, remember to consider the types of loans available. Conforming and non-conforming loans are different. It’s important to consider these differences and what works best for your finances before you apply for a mortgage. If you have bad credit, a conforming loan may be a better option for you.
If you have bad credit and want to buy a home, contact the credit specialists at Lexington Law Firm. Our team of paralegals and attorneys have helped thousands of clients remove millions of inaccurate, unfair, and negative information from their credit reports. Don’t let bad credit stand in the way of your dream of owning a home. Call today for a free credit consultation.