What is a Conforming Loan ? Part # 2

by Dian Hymer

Part 1 - Part 2 - Summary

Many lenders create home mortgages that are later sold to other investors. These loans are usually sold on the secondary money market to Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation), two organizations that purchase home loans at a discount to resell to investors.

Loans that are intended for sale to Freddie Mac or Fannie Mae must conform to rigid loan qualification guidelines, and they cannot exceed specified loan limits. These loan limits vary from one year to the next. In the past, the two organizations have always had the same upper loan limit. Last year, that common limit was $203,150. But, late in 1995, Freddie Mac raised their limit to $207,000. Fannie Mae, however, decided to hold their upper limit to $203,150.

Loans that conform to the Freddie Mac and Fannie Mae loan limits and qualifying requirements are referred to as conforming loans. Loan amounts that exceed the conforming loan limits are called jumbo loans. The qualifying criteria for jumbo loans is often easier than it is for conforming loans.

But prices for conforming loans are almost always better than they are for jumbo financing. Lender's usually quote two prices for each loan product they offer: one interest rate for conforming loan amounts, and another for loan amounts over the conforming limit.

First Time Tip: Borrowers who are having difficulty qualifying for a mortgage according Freddie Mac or Fannie Mae criteria should consider using a portfolio lender. A portfolio lender creates home loans that will become a part of that lender's own investment portfolio. Portfolio lenders are often more lenient in qualifying borrowers.

For example, Freddie Mac and Fannie Mae won't permit all of the down payment to be a gift if the borrower is applying for a 90 percent loan. Some portfolio lenders will allow this, providing the down payment money is a gift from the borrower's parents or grandparents. Portfolio lenders also may be able to stretch the qualifying ratios if your income is shy of what would be required for a Freddie Mac or Fannie Mae loan.

Mortgage Insurance (MI) is insurance, paid for by the borrower, to protect the lender in case the borrower defaults. MI is charged on conforming loans where the borrowers put less than 20 percent down. In the past, borrowers could avoid MI if they got a second mortgage for 10 percent of the purchase price and made a 10 percent down payment. This is called 80-10-10 financing.

Freddie Mac and Fannie Mae will no longer allow 80-10-10 financing without charging for Mortgage Insurance. To avoid MI on conforming first mortgage, the loan amount cannot exceed 75 percent of the purchase price. The amount of the second mortgage has to be increased to 15 percent of the price, if the borrower wants to avoid MI with only 10 percent down. A larger second mortgage raises the borrower's monthly mortgage cost because interest rates on second mortgages are usually higher than they are on first mortgages.

You can still get 80-10-10 financing, without MI, on non-conforming loans. You can even get 90 and 95 percent mortgages without MI from some portfolio lenders. But, expect to pay a higher interest rate for this type of financing than you'll pay for a conforming loan.

The Closing: Portfolio lenders are not only more flexible in approving borrowers, they also have more latitude in approving property condition. A portfolio lender might be your only option if you need an "as is" loan to buy a property in its present condition.