When you’re in the market for a mortgage on a new house, odds are you’re looking at a conforming loan.
A conforming loan is any loan which conforms to the guidelines set by Fannie Mae and Freddie Mac, the government-sponsored corporations which set standards for residential mortgage loans. Most loans are conforming loans.
Loans which do not conform to these standards are called non-conforming loans. If you’ve ever heard of a jumbo loan, that is an example of a non-conforming mortgage loan which exceeds loan limits set by Fannie Mae and Freddie Mac.
The standards for conforming loans were first set in the 1970s and have been developed ever since. Both non-conforming loans and conforming loans are known as conventional loans.
What are loan limits?
Loan limits are, simply put, the maximum amount of money which lenders can provide you under federal guidelines.
These loan limits can be exceeded, as mentioned before, but usually if you get a jumbo loan you’ll be paying a substantially higher interest rate. There are different limits set for single families, double families, three families, and four families. There are also limits for second loans and specific limits for high cost areas. These limits were all temporarily raised in 2008, but as of 2012, those limits were reduced again.
For a jumbo (non-conforming) loan you not only will need to pay a higher interest rate, but you’ll also need two appraisals on the house you’re interested in buying.
If you have to refinance a jumbo loan it can cost more since the closing costs are also typically much higher. For a time during the house crisis many very modest houses in expensive areas were purchased with jumbo loans since their prices soared so high. Since then many lenders have pulled out of the jumbo loan market, so these days it is less common to find jumbo loans.
Both conforming and non-conforming loans have many variations. For example, both types of loans are available with fixed or adjustable interest rates.
With a fixed rate you have one single interest rate which never varies over the timeframe of your loan. With an adjustable rate you get a very low rate for the first few years and then you pay whatever interest rate is determined by the housing market index in future years.
Other terms on loans can vary as well—while Fannie Mae and Freddie Mac set some guidelines, even among conforming loans there are many terms which are set by the lender. This is why shopping around is so critical.
When you shop for a home you will probably be looking mainly at conforming loans. These loans have better interest rates and are simply easier to deal with as a home buyer. If you are in the market for a very expensive property, however, you may still have to look for a non-conforming loan.
Regardless of which type of loan you have to look for, you should find a wide range of offers, so don’t give up until you find a good one.