Conforming Versus Non-Conforming Loans
So, where are the limits in conventional home lending and why do they matter? It certainly matters if you are seeking a luxury home that exceeds the limits for conventional home loans as defined by the FHA. Or if you have a high income, and you would like to live in a home that is more distinctive than the ordinary, whether you define that by location, style, or historical significance.
Why Do Loans Conform To Anything Anyway?
The division between conforming and non-conforming loans defines the structure of the home lending market, or at least the upper edge of it. It is the terms guaranteed by agencies such as Fannie Mae and Freddie Mac that give the home loan finance industry its internal structure, by guaranteeing the initial loans and then purchasing the paper and bundle the income streams of many loans into bonds that they hold or sell to institutions as investment securities.
The price to be a part of this government-backed system is the requirement that lenders “conform” to a set of regulatory standards that have become a fundamental part of home finance. The purpose is to help Americans become homeowners at affordable prices. The constraints are that borrowers must meet conditions such as credit score, down payment, and loan value.
Institutional Investment In Luxury Lending
Lenders act as mortgage originators, by signing up house buyers, advancing the funds at closing, and collecting the initial payments, then selling the rights to the cash flow on the paper. The maximum amount for single unit properties on conforming loans is $417,000 and in Alaska and some high-cost territories up to $625,500.
Jumbo loans lie above the conforming limits; Fannie and Freddie will not consider purchasing jumbo loans for their portfolios of securitized debt. Banks do securitize jumbo loans, but they expect higher yields on non-conforming loans. That, in turn, means higher interest rates for the consumers who make the payments on them. Jumbo mortgage interest rates have historically been about a quarter percent higher than their smaller conforming equivalents.
Differences In Lending Details
The demand for jumbo loans comes from the high-earning consumers that take them out to buy luxury homes. Banks look for borrowers with the ability to make at least a twenty percent down payment, have a low debt-to-income ratio, and a high credit score. Whereas conforming loans require six months of cash left after closing jumbo loans are more stringent; requiring twelve months of liquid reserves after the loan closes.
High earners often have significant portions of their income as bonus payments or shares and lenders will consider lowering installments as the balance drops, so the borrower can have the flexibility of making lump-sum payments when their proverbial ships come in.
If you have the income and the cash to set up a jumbo loan, you can purchase a distinctive home. Jumbo loans facilitate closing for properties that grace the covers of magazines and featured on television shows about the lives of celebrities. Whether you want a cottage in the most exclusive suburbs, a mansion in the hills or a distinguished townhome that expresses your status, a jumbo loan is a sensible alternative to tying all of your cash up in real estate.