This article is part of our guide on fannie mae and non-recourse loans in multifamily, available here.
Mortgages come in many shapes and sizes, each designed to meet the demands of the borrowing public. Each person or business has a different track record, and financing depends on the scope of what you want to do with said real estate.
This article discusses conforming and conventional loans, their similarities and differences, and how they function.
What is a Conforming Loan?
A conforming mortgage loan is one where the rules from Fannie Mae and Freddie Mac guidelines are met. The standards that a conforming mortgage is consistent. The underwriting guidelines and processing requirements must be met for approval. There may well be individual lender variants, but the basis for conforming approvals is the same. These loans are either recourse or non-recourse, and the terms of these loans are usually 15 and 30 years.
What is a 30-Year Fixed Conforming Loan?
A 30-year fixed conforming loan is one where the principal and interest payment is fixed for the life of the loan. These loans offer the lowest rates, meaning the debt-to-income ratios are lower than a 15-year fixed-rate mortgage.
The only way the monthly payment would change is if the borrower is escrowing taxes and homeowners insurance. Also, if there’s an increase or decrease in the taxes and insurance premiums, or if the borrower puts down less than 20%, or in the case of a refinance, the appraisal yields an LTV (loan to value) greater than 80%.
What is a Non-Conforming Loan?
A Non-Conforming loan is one where the guidelines for a conforming loan cannot or do not meet the criterion for conforming lending. Examples of non-conforming loans are FHA loans, B-D (poor credit loans), or loans where the LTV or DTI exceeds the maximum allowed. MIP will be charged with any FHA loans, and the LTV can be as high as 97.75%. The DTIs will be higher than a conforming loan, often as high as 50%. With B-D loans, borrowers do not typically escrow taxes and homeowners insurance premiums.
The rates on these loans are higher, and discretion must be utilized when processing or underwriting these loans. These loans are not fixed because they are either fixed for two years or adjustable for the remaining 28 years. The qualifying rate to use is the fully indexed rate. By way of example, if the start rate is 6% and the maximum capped rate is 2% per year for three years, the qualifying must take place at 12%. The maximum DTI on these loans is typically 50%.
After showing two years of perfect mortgage payments, most borrowers will refinance after the two years have expired. These loans are taken out so borrowers can combine their mortgage, car payment, and credit card debt to have a lower overall payment. There are many differences between Conforming and Non-Conforming loans.
What is the Difference Between Conforming and Non-Conforming Loans?
The differences between a conforming and non-conforming loan are many and varied. They both serve different functions for different borrowers. The processing and underwriting criteria differ in terms of maximum LTV and DTI, and the median credit score minimums differ. With a conforming loan, the maximum LTV is 80% unless the borrower is willing to pay for private mortgage insurance (PMI).
The maximum DTI is 43%, and the minimum credit score is no less than 620. Some lenders have some flexibility with these requirements. With an FHA loan, the maximum LTV is 97.75%, the maximum DTI is 50%, and the minimum median credit score requirement is 580. Jumbo loans, FHA loans, and subprime loans are non-conforming loans in that they are not backed, nor are they serviced by Fannie Mae or Freddie Mac.
Related Read: What is CLO Structuring?
What is a Conventional Loan?
Conventional loans are mortgage loans originated, backed, and serviced by private mortgage lenders. Banks, credit unions, and other privately held companies offer these types of loans. A credit score of no less than 620 is average, but many lenders want the borrower and co-borrower to have a minimum median credit score of 660. The down payment requirement is at least 20%.
Some lenders offer loans with 3% down, and 100% LTV programs are available. One of the requirements is that for any loan with an LTV over 80%, PMI is automatically triggered. Conventional loan limits in 2022 were increased to $647,200, and for high-cost areas, $970,800. Loans over the limits above would constitute a jumbo loan. Interest rates are primarily offered based on credit history, with the emphasis placed on mortgage payment history or rent payment history.
Under the terms of conventional lending, you can vie for either a fixed-rate loan or an adjustable-rate loan. Fixed-rate loans are typically 15 or 30-year terms. However, you can opt for an amortization schedule for early payoffs, should you choose. There are differences between conforming and conventional loans; we’ll cover these differences in the next paragraph.
What is the Difference Between Conforming and Conventional Loans?
Not all mortgages are created equal. Only conventional loans can be conforming, but not all conforming loans are conventional. If the standards for Fannie Mae and Freddie Mac are met, the loan is called conforming. The loan will be called conventional if the criteria are not met because most standards have been achieved. For example, a borrower applies for a mortgage, and the LTV is 75%, the credit grade score is 760, but the DTI is 46%. Since the standard for DTI maximum is 43%, the lender still approved the loan for closing. Under these terms, the loan is called conventional but non-conforming.
Frequently Asked Questions About Conforming and Conventional Loans
The advantage of a conforming loan is a lower interest rate and lower fees.
The downside of a conventional loan is that the rate and costs are higher than a conforming loan.
Difference Between Conforming and Conventional Loans - Conclusion
Whether you are buying your first home, a second home, or a multifamily property, your selection of a mortgage type should be based on your credit history, down payment monies, and your income/employment. If possible, it is recommended that a conforming loan should be applied for first, and if the application is denied, the next best bet would be a conventional loan.
If you’re building long-term wealth through private equity illiquid tax-advantaged multifamily real estate across the southeastern united states, join the investor club here at Willowdale Equity today.
- Better, “Is a Conventional Loan the Same Thing as a Conforming Loan?“
- MortgageNewsDaily, “Mortgage And Real Estate News“
- Forbes, “Conforming Vs. Non-Conforming Loan: Which Is Best For You?“
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