Understanding the nuances between different types of loan packages can make all of the difference between a successful and unsuccessful real estate negotiation. A conforming loan is a rather common type of loan; however, most buyers do not understand exactly what it is. They give up many possible benefits when they forego this understanding. Here are the eight questions that you should be asking about a conforming loan and the answers that you should be getting from your agents and bankers.
1. What exactly is a conforming loan?
A conforming loan is so named because it conforms to certain standards that are set by Fannie Mae and Freddie Mac. These two organizations are government sponsored enterprises (GSEs), financial services entities that are not created by the private market, but by the United States Congress. Another lesser known GSE that insures loans around the world is Ginnie Mae.
The main standard that a conforming loan has to meet is the maximum loan amount standard. This number is currently $417,000 for a single family home in most areas and a slightly higher $723,000 for areas that are considered high cost. These areas include famed metropolitan cities Los Angeles, New York, and San Francisco, and span 46 total counties. The limits are higher for multi-unit homes.
Hawaii has the highest home limits with conforming loan maximums that outpace even Los Angeles and the other high cost areas.
2. Why should I accept a limit on my loan amount?
There are certain advantages that come only with conforming loans such as various first time home buyer, down payment assistance programs, and other subsidy programs from the Federal Housing Commission (FHA), the United States Department of Veterans Affairs (VA), and the Navy Federal Credit Union. Many jumbo loans are not eligible for these substantial subsidies.
3. Is a conforming loan a conventional loan?
It is very important to separate the conforming loan from the conventional loan. Conforming loans are defined as mentioned above and are eligible for help from the FHA, the VA, and other government entities. The conventional loan is strictly defined as a loan package that does not receive any of this additional help. The difference can mean hundreds of thousands of dollars to you, so make sure that you understand the nuance.
4. Can a loan be conventional and conforming at the same time?
Fannie Mae actually offers a loan of this type that is known as a no income no asset (NINA) loan. This loan fits the criteria of a conforming loan because it limits the amount borrowed and is GSE compliant, and it is also conventional because there is no extra help from outside government agencies such as the FHA or the VA.
5. Does the government give me money with a conforming loan?
Although a conforming loan conforms to a government standard, you must understand that the government is not the entity that is giving you the money. The underwriters of the loan for your new house will be from a private financial institution that is working in conjunction with Fannie Mae, Ginnie Mae, or Freddie Mac. The government insures the borrower, backing the loan for the lender with the faith of the United States government. Lenders will be paid by the government if the borrower defaults, meaning that a borrower with a proper conforming loan is much less risky to the lender. Lenders like surety in the receipt of their monies, so if you have a conforming loan, you are much more likely to receive VIP treatment at your bank.
This is important to know because you as a buyer must still pass muster at the private banks in order to get money from a conforming loan package. Your debt to income ratio, monthly expenses, and credit report still need to be as good as possible for the best deal, even with a conforming loan package.
6. How many people get a conforming loan?
It is alleged that the government may be responsible for over 97 percent of the total loans in the United States through GSE compliant conforming loans. In any case, we know that the government is definitely a major player in the housing market, a stance that only increased during the 2008 housing crisis.
7. Can I still get financed for a home if I need to borrow more than the conforming loan limit allows?
Yes, you can still get financed by the FHA or the VA if the house that you want requires more funds than the conforming loan limit allows. However, you should try to negotiate the price down first, because increasing the amount of money that you need loaned to you also increases the scrutiny that your finances are put under.
8. Do I need 20 percent as a down payment to get a conforming loan?
Many people mistakenly believe that you must have 20 percent down in order to get a conforming loan package. As a matter of fact, many conforming loan packages are structured to help people who specifically are not able to afford this up front expense. This comes from a confusion of terms and a lack of research, a problem that may cost you a great deal of money in a negotiation or keep you out of the housing market altogether.
Make sure that you do business with a banker who can answer these questions for you. Keep your definitions straight to get the best deal on your real estate!
2 Point Highlight
Your debt to income ratio, monthly expenses, and credit report still need to be as good as possible for the best deal, even with a conforming loan package.
Many people mistakenly believe that you must have 20 percent down in order to get a conforming loan package.
