Pictured: 204 Wyndemere Ln, Lake Saint Louis, MO
Conforming vs. Non-conforming Loans
Who decides what’s conforming and what’s non-conforming? Fannie Mae and Freddie Mac, the stockholder-owned corporations that purchase mortgage loans from lending institutions. They package the mortgages into securities and sell the securities to investors. By doing so, a continuous flow of affordable funds for home financing results in the availability of mortgage credit for Americans. Their guidelines also establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties.
Non-conforming loans are for borrowers whose situations do not “conform” to strict Fannie Mae/Freddie Mac underwriting guidelines. Most of the time, a loan is considered non-conforming because it exceeds the maximum loan limits. These non-conforming loans are known as "jumbos." The 2017 conforming loan limits in Missouri are $424,100 for a one-family residence; $543,000 for a two-family residence; $656,530 for a three-family residence; and $815,650 for a four-family residence. FHA and VA loans are a separate animal entirely
Expect these numbers to change soon. This is the time of year when the FHFA (Federal Housing Finance Agency) when we expect them to release the 2018 limits.
Conforming loans are much easier to qualify for than non-conforming loans. They also close faster, have reduced or no reserve requirements, allow expanded use of loan proceeds and provide higher levels of cash out for debt consolidation.
There are many other circumstances which might otherwise a borrower from utilizing a conforming loan product. For example:
- Self employment
- Complicated tax returns
- Current or previous credit difficulties
- Using the loan to repay federal tax liens
- Recouping equity from a homestead
- Utilizing stocks/bonds as collateral or down payment during the transaction
Since the most important difference between conforming and non-conforming loans involves loan limits, the vast majority of borrowers qualify and utilize conforming mortgage loans. In case you're curious, these loan limits are 50 percent higher for loans made in places like Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Properties with five or more units are considered commercial properties and are handled under different rules. FHA and VA loans are also separate animals that we will tackle another day.
One common way to bridge the gap between the conforming limit and a high purchase price is to employ piggy-back financing. This involves getting a first mortgage for the conforming limit and make up the difference with a second mortgage. A word of caution, however: You should only do this if you plan to pay off the second mortgage quickly because you’ll be paying a higher interest rate (anywhere from 1-3 percent over the first-mortgage rate).