Comparing the Features of Conforming and Non-Conforming Loans

Conforming loans are those mortgages that meet the standards of the government-sponsored entities, or GSEs. The GSEs are a group of financial companies created by the United States Congress to ensure the smooth flow of credit and health of the financial sector of the economy. If a mortgage loan doesn’t conform to the guidelines because it is a higher loan amount, it is known as a jumbo loan. Any loan that doesn’t meet the guidelines for anything other than size is considered a non-conforming loan. Let’s take a closer look at the features of both loan types.

 

Features of Conforming Loans

These loans are not as risky as non-conforming loans because the government is willing to back them in most cases, which provides some extra assurance to the lender. As the lender has to worry about the risk involved with the loan, it will take care to make sure the borrower can afford the payments. If there is any question about the borrower’s ability to pay the loan, the lender will not generally approve it. Typical guidelines for a conforming loan are as follows, though some lenders and loan programs may have slight variations:

 

The mortgage payment, including taxes and insurance, usually should not exceed more than 28% of the borrower’s income. Combined with all other debt, the borrower should not have used more than 36% of all income before taxes. With these ratios, banks are comfortable because there is a much lessened risk for default and foreclosure. 

 

The credit score will determine the interest rate, but if there is more than one payment 30 days late, the loan may not be approved. 

 

There must also be enough funds to close from the borrower’s own money. The funds to close will include the down payment. After all those payments have been made, lenders like to see at least two house payments in the bank so they know they are covered if a financial hardship strikes the borrower.

 

Features of Non-Conforming Loans

 

Since a non-conforming loan fails to meet the bank requirements for funding, getting one approved is generally more difficult. While there are lenders who specialize in dealing with non-conforming loans, many lenders shy away from them because of the risk and the amount of work involved with them. The credit score of the borrower is used only to determine the interest rate of the loan, which is generally anywhere from 1% to 6% higher with a non-conforming loan, anyway. Those with lower credit scores will have to pay a higher interest rate, which means the loan will cost them more because of the risk involved to the lender. All non-conforming lenders will have a different set of guidelines in terms of the acceptable debt ratio, credit score, and funds to close. This is important to consider when shopping for a loan of this nature. 

 

While non-conforming loans are commonly seen in the United States, they are still not as common as the conforming loan option. For more information about the two loan types, speak to a local lender. 


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