Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Conforming Loan
Does the word conforming loan make you want to scratch your head? Well, in this post, we will understand what is conforming loan and how it works.
What is Conforming Loans?
A conforming home loan is a conventional loan that meets the loan limit guideline which is set by the Federal Housing Finance Agency, a.k.a. FHFA.
Depending on the type of property and the area you live in this conforming loan limit could be higher or lower.
The conforming loan limits are determined by the county of the property and are updated as necessary. They meet underwriting guidelines set by Fannie Mae and Freddie Mac the quasi-government agencies that buy mortgages from banks.
The nice thing about conforming mortgage loans is that they are easier to qualify for and can have lower interest rates.
The lender may also give a little more flexibility with terms like down payments and credit scores because they know that they can sell mortgages to Fannie Mae or Freddie Mac, thereby freeing up cash to provide more loans and collect fees.
How does a conforming mortgage loan work?
Conforming home loans is to prevent lenders from lending money to borrowers who can’t afford their loan payments.
They also help protect people from taking on more debt than they can manage and also protect the lender from taking on too much risk.
Since the loan borrowing guidelines for conforming mortgages are made by Fannie Mae and Freddie Mac.
The lenders have to follow them to ensure that these agencies are buying the mortgages from the lenders and the lenders receive a constant flow of money to bring in more loans.
Please note that Fannie Mae and Freddie Mac only buy conforming loans. For a conventional loan to be considered as a conforming loan the loan amount should be lower than the limit set by FHFA.
For example, if you are planning to buy a single unit home in Texas which is for $400,000 and you qualify for a conventional loan of $380,000.
Your loan of $380,00 is less than the FHFA limit in Texas of $510,400 making it a conforming mortgage loan.
Benefits of Conforming Loans
Conforming loans typically offer lower interest rates to borrowers. They can be easy to qualify for compared to jumbo loans. With conforming loans, you can get the benefit of making the minimum down payments.
The conforming loans have standardized guidelines that are meant to protect you as a borrower and the lender from poor lending practices.
What are the Conforming Loan Limits in 2020?
The conforming loan limits have increased in 2020. For most of the counties in the country, the limit is now $510,400 compared to last year’s $484,350.
What does it mean for a borrower or a buyer? The bottom line is that it will increase your purchasing price power as a buyer as well as saving money on your cash to close if you are buying in a jumbo territory.
The updated conforming loan limit has increased the buyer’s purchase power by 5% and also is giving benefit to the homeowners if they are planning to utilize their home equity.
Conclusion
The loans which are over and above the conforming limits are usually hard to qualify for and with strict guidelines.
Hence, trying to get a conforming loan is always the best option when you are getting a conventional loan.
Since the conforming loans bring more benefits to the table if you qualify, so getting one for yourself could be a smart move.
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I never knew that a conforming loan makes sure that the lender can pay for their loan without issues. My friend plans to purchase a home for his future wife so that he won’t need to rely on his parents anymore. I’ll probably help him consider this loan while hunting for a home.