Buying Your First Home? Understanding Conforming And Non-Conforming Mortgage Loans

If you are buying your first home and are confused about the difference between conforming and non-conforming mortgage loans, then here's everything you need to know:

"Who" are Fannie Mae and Freddy Mac?

To understand mortgage loans, you first need to understand "who" Fannie Mae and Freddy Mac are. While they sound like people, Freddy Mac and Fannie Mae are actually the name of two government-sponsored enterprises (GSEs) who purchase qualified mortgage loans from banks. They package the loans up and then resell them in the secondary market as mortgage-backed securities.

Conforming Loans are Sellable to Fannie Mae and Freddy Mac

In order for a mortgage loan to be considered "conforming" it must qualify for being sold to Fannie Mae and Freddy Mac. The guidelines for doing so are set by the United States Federal Housing Finance Agency (FHFA).

All mortgages that meet the conforming guidelines can be sold by the loan originator to Fannie May and Freddy Mac because the FHFA's guidelines make them a much less risky option than non-conforming loans.

The FHFA's Guidelines for Conforming Mortgages

There are many different things that are covered in the FHFA's guidelines, but the major requirements refer to:

  • the creditworthiness of the borrower(s)
  • the down payment amount
  • the maximum loan amount
  • the suitability of the property

Non-Conforming Mortgage Loans

Since banks can't sell non-conforming loans and must hold them for their entire life or sell them to specialty bulk buyers, banks will often charge higher interest rates for this type of mortgage. However, if the property you are purchasing necessitates a non-conforming loan, then it isn't necessarily a bad thing. It just means you need a different lending option.

The most common types of non-conforming mortgage loans are:

  • loans with a small down payment
  • borrowers with sub-standard credit ratings
  • borrowers with a high debt-to-income ratio
  • jumbo loans for very expensive homes

In addition, loans for properties zoned for commercial space, farms, and many condominiums are considered non-conforming loans. 

FHA, USDA and VA loans are also considered non-conforming, because they are backed by the federal government and not sellable to Fannie Mae or Freddy Mac. This is further proof that non-conforming loans aren't necessarily a "worse" option than a conforming loan. They are simply different lending products.

Where to Turn for More Information

For additional information about both conforming and non-conforming home loans, the best person to speak with is always going to be a professional mortgage lender