A conforming loan is a conventional loan that meets certain criteria established by the two government-sponsored entities (GSEs), Fannie Mae and Freddie Mac. The primary factor between a conforming and non-conforming loan is the size of the loan. Each November, based on October-October home price data, the Federal Housing Financing Agency (FHFA) publishes the conforming loan limits for the following year. These limits are the maximum loan amounts that Fannie Mae and Freddie Mac can purchase. Once enough of these loans have been purchased, they are combined and resold as mortgage-backed securities on the secondary market. Roughly 80% of all residential mortgages in the United States are backed by these two GSEs.
The current maximum size of a loan that Fannie Mae or Freddie Mac will purchase is $453,100. This current limit has been in place since 2006. The conforming loan limit can be as high as $679,650 in certain high-cost areas. San Francisco is considered one of these high-cost areas and loan limits here are set to the maximum of $679,650. Loan limits are set by county.
Conforming loans must also meet certain debt-to-income (DTI), down payment, and documentation guidelines as well. Since these criteria must be met, the loans are often considered lower risk and more easily sold on the secondary market. This allows for conforming mortgages to be offered at lower rates than non-conforming alternatives. Conforming loans also do not require an upfront mortgage premium that FHA and VA loans require. If the down payment is at least 20 percent or higher, there is no monthly mortgage insurance either.
Historically, the 20 percent down payment figure was standard, however Fannie Mae and Freddie Mac have recognized that this down payment requirement was often a significant barrier to homeownership. There are new programs available such as their 97 percent Loan-to-Value (LTV), or “Conventional 97” program that allows borrowers to make a down payment of as little as 3 percent.
A non-conforming loan is one that simply does not meet the requirements dictated by Fannie Mae and Freddie Mac. This can be the result of the size of the loan or unmet DTI requirements. As they are not eligible to be purchased by these enterprises, they can often carry higher rates, down payment requirements, and insurance premiums.
CA Mortgage Pro offers excellent rates and financing options on conforming mortgages throughout the San Francisco bay area. With over 25 years of local experience in the mortgage industry, we have detailed knowledge of all of the Fannie Mae and Freddie Mac requirements on conforming loans. For more information on or any questions you may have on conforming loans, contact CA Mortgage Pro today.