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CONFORMING MORTGAGE LOANS
A conforming home loan is one that is sold on the secondary
mortgage market to one of two governmental agencies. These government
organizations that purchase loans from collaborating lenders are
Fannie Mae and Freddie Mac. Both groups have a limit that is
set annually on the loan amounts that they buy. For example, the
conforming loan limits for a one family house in 2003 was $322,700
and in 2004 it was raised to $333,700. For 2006, conforming loan
limits are $417,000.
What kind of interest rates are associated with conforming loans?
Who qualifies for conforming mortgages?
Interest rates for conforming loans are the most competitive on the
market. However, getting approved for a conforming mortgage is not
easy. If you have poor credit, you will have a better chance
obtaining approval for a conventional mortgage product.
What if the home I am buying costs more than the conforming loan
limit?
Most people looking to take advantage of the low interest rates
conforming loans offer will put enough money down to keep their loan
amount within conforming limits. However, putting enough money down
in areas where homes are very expensive is not easy, i.e. Boston, New
York or Los Angeles. There are solutions for people living in these
high priced areas
One thing you can do minimize the difference between the conforming
limit and the purchase price of your home, without having to use a
jumbo loan, is to use two mortgages. Your first mortgage would be a
conforming loan, while your second mortgage will likely be a
home
equity loan.
Here is an example of how this dual mortgage, sometimes known as
piggy-back financing, works: Suppose you are purchasing a house for
$575,000, with a down payment of $80,000. This means you will need to
finance $495,000. Since conforming loan limits for 2006 are $417,000,
you will need a second mortgage for $78,000.
You can learn more about
'piggy-back' financing here.
More about conforming loans....
Fannie Mae nor Freddie Mac will allow your down-payment to be from a
gift if you are applying for a loan that is going to be 90% or more
of the selling price. Portfolio lenders have the ability to allow you
to use a gift as your down-payment. Also, there is no ability to
stretch your qualifying ratios when applying for a conforming loan.
On the other hand, while applying for a conventional loan you can.
If you are putting down less than 20% for your conforming loan, you
will need to buy
private
mortgage insurance, otherwise known as
PMI.
PMI protects the lender in case go into default on your loan.
Meaning, you do not pay your loan. Borrowers used to be able to avoid
paying PMI if they utilized a second mortgage for ten percent of the
buying price, in conjunction with a ten percent down payment. This is
known as 80-10-10 financing. However, neither Fannie Mae nor Freddie
Mac allow 80-10-10 financing.
The only way to avoid PMI with a conforming loan is to not exceed
financing 75% of the purchase price. Therefore, you would need to
increase the financing amount of your second mortgage to 15% if
you only have enough for 10% down.
You can still get 80-10-10 financing, without having to pay mortgage
insurance, on non-conforming loans. It is even possible to obtain a
mortgage loan for as much as 95% of the purchase price.
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