Understanding Conforming Mortgages

A conforming mortgage is a type of home loan that meets the standards and requirements of Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that buy and guarantee mortgages from lenders. 

Conforming mortgages are advantageous for borrowers who have good credit and can afford a sizable down payment or equity, as they typically offer lower interest rates and more favorable terms than other types of mortgages.

What Is A Conforming Mortgage?

A conforming mortgage is a mortgage that conforms to the guidelines and limits set by Fannie Mae and Freddie Mac. These GSEs purchase mortgages from lenders and package them into mortgage-backed securities (MBS), which are then sold to investors on the secondary market. By doing so, they provide liquidity and stability to the mortgage market, as well as affordable homeownership opportunities for qualified borrowers.

One of the main criteria that a mortgage must meet to be considered conforming is the loan limit, which is the maximum amount that can be borrowed. For 2023, the conforming loan limit for a single-family home is $726,200 in most parts of the U.S., but it can be higher in some high-cost areas, such as San Francisco and New York City. 

The 2023 ceiling for these areas is $1,089,300, or 150% of $726,200 . There are also special provisions for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the baseline loan limit is also $1,089,300 for one-unit properties in 2023.

Besides the loan limit, a conforming mortgage must also adhere to other standards regarding the borrower's credit score, debt-to-income ratio, down payment or equity, loan-to-value ratio, and documentation requirements. These standards vary depending on the type and purpose of the loan, but generally speaking, a conforming mortgage requires:

• A credit score of at least 620
• A debt-to-income ratio of no more than 36%, although some exceptions may apply
• A down payment of at least 20% for a purchase or 20% equity for a refinance, although Fannie Mae and Freddie Mac also back conventional loans with as little as 3% down
• A loan-to-value ratio of no more than 80%, although Fannie Mae and Freddie Mac also back conventional loans with an LTV max of 95% to 97%, depending on whether it's an adjustable- or fixed-rate mortgage, or if you're a first-time homebuyer
• Sufficient income and asset documentation to verify your ability to repay the loan

Why Choose A Conforming Mortgage?

A conforming mortgage can be a great option for borrowers who qualify for its terms and conditions. Some of the benefits of a conforming mortgage include:

• Lower interest rates

Because conforming mortgages are backed by Fannie Mae and Freddie Mac, they pose less risk to lenders and investors than nonconforming mortgages. As a result, they typically have lower interest rates than other types of mortgages, such as jumbo loans or FHA loans .

• More flexibility

Conforming mortgages come in various types and terms, such as fixed-rate or adjustable-rate mortgages (ARMs), 15-year or 30-year terms, conventional or government-insured loans (such as VA or USDA loans), etc. This gives borrowers more options to choose from based on their preferences and needs .

• No private mortgage insurance (PMI)

If you make at least a 20% down payment or have at least 20% equity in your home when refinancing, you can avoid paying PMI on your conforming mortgage. PMI is an extra cost that protects the lender in case you default on your loan. By avoiding PMI, you can save money on your monthly payments and over the life of your loan .

• Easier to sell or refinance

Because conforming mortgages meet the standards of Fannie Mae and Freddie Mac, they are easier to sell or refinance than nonconforming mortgages. This means that you can take advantage of lower interest rates or better terms if they become available in the future .

How To Get A Conforming Mortgage?

If you're interested in getting a conforming mortgage, you'll need to shop around and compare offers from different lenders. You can use online tools and calculators to estimate how much you can borrow, what your monthly payments will be, and how much interest you'll pay over the life of your loan. You can also check your credit score and report to make sure they are accurate and up to date.

Once you find a lender that offers a conforming mortgage that suits your needs and budget, you'll need to fill out an application and provide the necessary documentation, such as proof of income, assets, debts, and identity. 

The lender will then review your application and perform a credit check, an appraisal of the property, and a title search. If everything is in order, the lender will approve your loan and set a closing date.

At closing, you'll sign the loan documents and pay any fees or costs associated with the loan, such as origination fees, appraisal fees, title fees, etc. You'll also receive the keys to your new home or the funds to pay off your existing mortgage if you're refinancing.

A conforming mortgage is a type of home loan that meets the standards and requirements of Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and guarantee mortgages from lenders. 

Conforming mortgages are advantageous for borrowers who have good credit and can afford a sizable down payment or equity, as they typically offer lower interest rates and more favorable terms than other types of mortgages. 

Conforming mortgages also come in various types and terms, giving borrowers more flexibility and options to choose from. To get a conforming mortgage, you'll need to shop around and compare offers from different lenders, fill out an application and provide the necessary documentation, and close the loan with the lender of your choice.