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Conforming and Nonconforming Mortgages: What's the Difference?

Admin • Oct 27, 2020
People Discussing with Loan Graphs — Costa Mesa, CA — Secure One Capital
When it comes to home mortgages, many new buyers are surprised at the variety of options they may have access to. This calls for decisions that they may not have expected. One of these is the choice between a conforming mortgage loan and a nonconforming loan. What are these two types of loan? And which is right for you? Here's a guide to the basics. 

What Makes a Loan Conforming?
The distinction between a conforming loan and a nonconforming one is whether or not it adheres to the rules set by Freddie Mac and Fannie Mae. These two organizations are used by the United States government to guarantee mortgages made by private lenders in order to reduce risk and raise investment. Because the companies guarantee the loans, these loans must conform to their rules to be included.

By far, most home mortgages today conform to the rules and can be underwritten by these guaranteeing agencies. However, some circumstances call for a mortgage that goes beyond the limits and conditions given. When this happens, the loan may be classified as nonconforming. 

What Rules Must Be Conformed To?
So, what are the rules that your conforming loan must follow? Buyers are most affected by a few major points. First is the limit on the amount you can borrow. According to the Federal Housing Finance Agency, in 2020 the standard limit is $510,400, although it is raised to $765,600 in high-cost counties and the states of Alaska and Hawaii.

Second, you must qualify within income and debt limits. This is represented by the debt-to-income ratio. The ratio is the percentage of your income that goes toward paying debt of all sorts each month. If you have more debt than is permitted, you may not qualify for the full amount you want or have to reduce other sources of debt. 

Finally, your credit score matters as well. As a rule, you must also have a good credit score of 620 or above. 
 
How Do Nonconforming Loans Differ?
Because it doesn't have to adhere to these rules, a nonconforming loan is free to make adjustments as the lender sees fit. The lender may offer what are known as jumbo loans, which are greater than what the guaranteeing agencies allow. They may also accept lower credit scores on an as-needed basis. And finally, the lender is free to request higher minimum down payments if it chooses. 

Clearly, borrowers in nontraditional situations benefit from access to these loans. If you need to borrow a greater amount or don't have all the documentation required by traditional loan processes, nonconforming loans open up more possibilities for you. Similarly, buyers who are still recovering from lingering credit issues may be able to buy a home faster than they thought possible. 

Freedom from the rules means a lender has more choice in what they want to give out. But they may also have to charge higher rates to absorb the greater risk of being nonconforming. And higher down payments often help mitigate the risk of financial loss as well. 

Both conforming and nonconforming mortgages have their benefits. Conforming loans are more plentiful and may be easier to qualify for in many traditional circumstances. Nonconforming loans, on the other hand, offer more flexibility both in size and in various qualifying factors. Therefore, any buyer should research all their options before they make a decision. 
At Secure One Capital Corporation, we offer both types of loans so you can choose the one that's right for you. Learn more by making an appointment to talk with a lending pro today. We look forward to working with you.

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