Buying a home involves a mix of excitement and exhaustion, learning about the types of mortgages alone can be a roller coaster ride, even if it’s not your first time. Learning the fundamental concept such as conforming loans can go a long way, especially how they relate to the type of mortgage (conventional or government-insured) you’re applying for. In this guide, we’re going to explore the ins and outs of conforming loans, how you can qualify, and how they would affect borrowers (positively) throughout the homebuying process.

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Conforming Loans Defined

Conforming loans are called as such because they’re the types of mortgages that meet the guidelines set forth by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) as well as the amount limits set by the Federal Housing Finance Agency (FHFA). Lenders guarantee payment for home loans and sell them to these organizations (Fannie Mae and Freddie Mac) who then package them as securities that are sold to financial institutions on the open market. The liquidity and oversight from government regulations allow these types of loans to yield lower interest rates than their non-conforming conforming counterparts.

How They Work

Fannie Mae and Freddie Mac steer the home loan markets and, as such, have set standard guidelines and regulations for single-family mortgage offerings to conform to for them to be eligible for backing from the two agencies. These guidelines help prevent borrowers from having more debt than they can manage while protecting lenders from issuing mortgages to borrowers with high risk or probability to fall behind on payments.

To be clear, Fannie Mae and Freddie Mac only work behind the scenes to ensure the mortgages issued by lenders and shoulder the payments should borrowers fall short or act as ancillary markets if lenders wish to sell the mortgages. The FHFA has regulatory oversight that guarantees both Fannie Mae’s and Freddie Mac’s mandate to prop up homeownership to middle-class, low-income citizens.

Conforming Loan Limits

The Housing and Economic Recovery Act (HERA) stipulates that the Conforming Loan Limits (CLL) be adjusted to reflect a fluctuating average of home prices across the U.S. The term conforming in the context of home loans then refers to the mortgage amount, a figure (in U.S. Dollars) set by the FHFA on a yearly basis. For the coming year of 2022, the base limit is benchmarked at $647,200 for the majority of the country (including Houston). In “areas (such as New York and Los Angeles) wherein 115% of the local median home value exceeds the baseline conforming loan limit, the applicable loan limit will be higher than the baseline loan limit.” “HERA establishes the high-cost area limit in those areas as a multiple of the area median home value while setting a ‘ceiling’ at 150 percent of the baseline limit. The new ceiling loan limit for one-unit properties will be $970,800, which is 150 percent of $647,200.”

Other regulation criteria for conforming loans include:

Loan-Value-Ratio (LTV) – as much as 97% is needed so this means borrowers should put 3% on down payment.

Debt-to-Income Ratio (DTI) – A minimum credit score of 620 and below 50% DTI is required to qualify.

How Lenders and Borrowers Benefit from Conforming Loans

These types of loans may be a little stringent when it comes to requirements but they have their perks too:

• Borrowers with high credit scores can enjoy lower interest and low monthly payments
• It’s one of the most common types of mortgages out there for borrowers to easily compare prices, terms, and services
• The standardized regulations and guidelines secure both lenders and buyers from the consequences of inefficient lending practices

The home buying process entails interconnected decisions. To help you narrow down your home buying considerations, search through these available properties.

Disclaimer: Shop Owner Finance/ TL Global is not a lender. We are a real estate training agency. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.