All About Conforming Loans – What You Need to Know
Providing a wide range of loan products and services to your clients is crucial for retaining and growing your business. By diversifying your offerings, you can meet your clients’ varying needs, allowing you to serve a wider variety of people. For instance, you’ll want to offer conforming loans, which are available from top wholesale lenders. These are mortgages that follow the guidelines and terms set by the Federal Housing Finance Agency or FHFA, Fannie Mae, and Freddie Mac.
This type of home loan allows Fannie Mae and Freddie Mac to purchase a mortgage from the lender since it meets the conditions and loan size limits implemented by the three institutions. Here’s what you need to know about conforming loans:
The Purpose of a Conforming Loan
Fannie Mae and Freddie Mac buy mortgages from correspondent lenders and hold them in portfolios or put them into securities to meet the FHFA’s goals. These include achieving stability, affordability, and liquidity in the mortgage market. However, these two institutions are constrained by law to purchase conforming loans that do not surpass the FHFA’s limits, known as conforming loan limits. They often differ by year and location.
There are other underwriting criteria involved in conforming loans. For instance, Fannie May requires lenders to consider the debt-to-income ratio, loan-to-value ratio, and credit score.
The Borrowing Limits of a Conforming Loan
Loan limits change every year. The FHFA increased the maximum conforming loan limit to $548,250 in 2021 from $510,400 in 2020, which means borrowers can now request higher loan amounts. The FHFA has also provided a complete list of conforming loan limits by county to inform home buyers of these limits’ vast differences.
The Housing and Economic Recovery Act (HERA) mandates that the conforming limit must be adjusted every year to indicate the changes in average homes’ prices in the United States. When prices rise, so do conforming loan limits, ensuring that housing remains accessible for those with lower to middle income. The same applies to high-cost areas, although they offer “conforming jumbo” loans that provide even higher loan limits for one-unit properties. In these areas, the maximum loan limit is $822,375.
The Pros and Cons of a Conforming Loan
Conforming loans offer plenty of advantages. For instance, they have a manageable loan size, motivating home buyers to choose a house they can afford and effectively reducing the chances of defaulting on their loans. They also come with lower interest rates, helping home buyers save more over the loan’s term. There is also a potential for a smaller down payment, with the cost being as low as 3 percent of the purchase price. Still, a down payment of at least 20 percent is desirable as it eliminates the need for mortgage insurance.
On the other hand, conforming loans also have their drawbacks. They have restrictive loan limits, which can be too constraining for home buyers’ needs, or those who live in areas where conforming jumbo limits with higher limits aren’t accessible. The loan is also more difficult for borrowers with poor credit and a lot of debt, as Fannie Mae and Freddie Mac adjusted the debt-to-income ratio after the 2008 financial crisis to reduce the risk of default. As such, borrowers with too much debt or a low credit score may struggle in getting conforming loans.
Conforming loans are an excellent option to provide your clients with, as they come with many advantages while diversifying your offerings. They’re a great choice for the average homebuyers as long as they are within the loan limit and fulfill the essential underwriting criteria, offering them the most advantageous terms.
FSB Mortgage is among the top wholesale mortgage lenders in the country. Our broker to banker service ensures that all our clients get the best loans possible, including jumbo loans, government loans, conforming loans, HELOC, and non-QM loans. Contact us today to find out more about the loans we can offer you!