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There are different types of mortgage facilities in the market. Each of these loans comes with different terms and conditions. One of the most popular mortgages is the conforming loan. Typically, conforming loans offer low-interest rates since they meet Federal Housing Finance Agency's (FHFA) terms. This post discusses conforming loan programs in detail.
What Is a Conforming Loan?
In essence, a conforming loan program is a mortgage falling within the loan size limit provided by the FHFA. More so, the loan adheres to rules set by Fannie Mae and Freddie Mac, the two companies that insure conforming loans. Also, the two companies can purchase your conforming loan from the lender. Typically, Fannie Mae and Freddie Mac purchase mortgages in the secondary market to stabilize the market. The companies can then package the mortgages into securities or hold them. However, the law dictates that the two companies cannot buy mortgages surpassing the limits set by the FHFA. Thus, the key distinctive feature of a conforming loan is that it is equal or lesser to the set limit.
Conforming Loans vs. Non-Conforming Loan
It is essential to distinguish between conforming and non-conforming loan programs. Notably, any loan mortgage that exceeds the FHFA conforming loan limit falls into the non-conforming category. Typically, the terms and conditions of non-conforming loans may vary across lenders. However, the interest rates and the down payments are high. These higher costs result from the fact that the non-conforming loans have no government guarantees. Thus, demand for non-conforming loans is lower than for conforming loan programs.
Pros of Conforming Loans
The primary benefit of applying for a conforming loan is the low-interest rates. Typically, you get to save a lot on a conforming loan, given that mortgage payments run into decades. Also, a conforming loan encourages one to apply for a manageable loan size. In this way, you can reduce the risk of defaulting and subsequent foreclosure resulting from huge mortgages. The loans come with flexible terms from Fannie Mae and Freddie Mac, including smaller down payments and lower credit scores. Notably, most lenders will prefer to work with conforming loan programs since they can repackage the loans and sell them in the secondary market.
Cons of Conforming Loans
Broadly, the conforming loan limits are restrictive. As a result, one may not qualify for a conforming loan if they borrow more than the set limit. This limitation is unfavorable for someone wishing to purchase a luxury home. Fortunately, one can explore non-conventional loan options.
Always weigh the pros and cons of conforming loan programs before an application. Essentially, conforming loans are more affordable and flexible compared to non-conforming loans. However, the FHFA borrowing limit restricts the credit amount. To learn more about conforming loan programs, contact a lender.
Share24 June 2021
