The holidays are a stressful enough time with family obligations, parties, purchasing the right gifts for loved ones, and balancing your finances. After big sales holidays like Black Friday and Cyber Monday you may be anxiously checking your bank account and scrambling to pay both holiday bills and monthly commitments such as your mortgage. Up […]
What is a Conforming Loan?
As a loan officer, you should be aware of your borrower’s needs and the best options for them when they come to you for a home loan. It’s your job to give them choices that work with their financial situation, and conforming loans will be one type of financing that you will see very often.
Characteristics of a Conforming Home Loan
- Loan limit of up to $417,000 for a single-family home
- Follows the guidelines of Fannie Mae and Freddie Mac
- Easier to sell on the secondary market because they have less risk
- Meeting the guidelines based on the borrower’s debt-to-income ratio
If your client’s loan limit exceeds $417,000, they will need a jumbo loan, which is non-conforming. Inform them that jumbo loans aren’t guaranteed by government sponsored enterprises and carry a higher risk.
The Benefits of a Conforming Loan
There are several advantages that come with obtaining a conforming loan over other financing options.
- Competitive interest rates
- Lower monthly mortgage payments
- No prepayment penalties
- Typically have a faster turnaround time than other loans
With these benefits, clients who get a conforming loan generally pay less over the life of the loan.
Why Your Borrower May Not Qualify for a Conforming Loan
There are a few issues that could prevent your borrowers from qualifying for a conforming home loan:
- Credit History and Score: If your borrower has a history of late payments and a credit score of 620 or less, they most likely will not be approved for a conforming loan.
- Debt-to-Income Ratio: Most lenders will not give borrowers a conforming home loan is their debts make up more than 45% of their income.
- Loan-to-Value Ratio: The percentage of the home’s purchase price that your borrower will pay with their mortgage. Usually, borrowers can obtain 90% of the financing needed to purchase their home. If the loan-to-value ratio is higher than 90%, your borrower may not be able to qualify.
- Documentation: Borrowers are required to provide their lender with complete documentation of their employment history, income, debts and assets. Otherwise, they will not be issued a home loan.
- Bankruptcy: Typically borrowers who have had a bankruptcy in the last two years will not be able to obtain a conforming loan.