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Understanding Conforming Loans: A Guide by O1ne Mortgage

If you’re exploring mortgage options, you’ll likely come across conforming loans, the most prevalent type of home loan. Conforming loans have government-set limits and adhere to the borrowing guidelines of Fannie Mae and Freddie Mac, two government-backed mortgage companies that own many residential mortgages in the United States.

What Is a Conforming Loan?

A conforming loan is a type of conventional loan that meets the maximum loan limits established by the Federal Housing Finance Agency (FHFA) and adheres to the lending criteria of Fannie Mae and Freddie Mac. These enterprises package and sell conforming loans on secondary markets, similar to stocks. This ability to sell your mortgage to Fannie Mae or Freddie Mac essentially guarantees your loan, often resulting in lower interest rates and more favorable terms compared to non-conforming loans.

For 2023, conforming loan limits are set at $726,000 for single-unit properties, with higher limits of up to $1,089,300 in high-cost areas. You can use the FHFA’s conforming loan limit map to determine the loan limit in your county.

Pros of Conforming Loans

Your budget, credit score, and unique financial circumstances will significantly influence whether you should take out a conforming loan. Here are some benefits:

Less Stringent Lending Requirements

Generally, qualifying for a conforming loan is easier than for a non-conforming one. Lenders usually require a minimum credit score of 620 for conforming loans. Additionally, conforming loans require a minimum down payment as low as 3% with good credit, which is often lower than the down payment requirements for non-conforming loans.

Possible Lower Interest Rates

To compensate for the additional risk associated with non-conforming loans, lenders often increase interest rates by 1 or 2 percentage points on jumbo loans. Your lender will also consider your credit score, income, assets, and other financial metrics to determine the interest rate on your mortgage.

Faster Loan Processing

Since Fannie Mae and Freddie Mac guidelines are quite standardized, you likely won’t encounter irregular lender requirements that could delay the process.

Loan Protections

Conforming loan lenders must comply with the Truth in Lending Act and other legislation that protects consumers against predatory or unfair lending practices. For example, homeowners with loans owned by Freddie Mac who experienced Covid-related financial difficulties could qualify for up to 18 months of forbearance and have penalties and late fees waived.

Cons of Conforming Loans

While conforming loans offer favorable rates and terms, they may not be the best option for everyone. Consider these potential downsides:

Lower Borrowing Limit

Conforming loans cap financing at $726,000 for single-unit properties but extend the limit to $1,089,300 in certain high-priced regions. If you need more than these FHFA limits allow, you must secure a non-conforming jumbo loan.

Stricter Loan Criteria

In some cases, conforming loans have more stringent lending requirements. For example, the minimum credit score for conforming loans is 620, but if your score falls below that threshold, you might consider an FHA loan which requires a minimum score of just 500.

Potential for Private Mortgage Insurance

While you may qualify for a minimum down payment of only 3%, you could have to pay PMI if you put down less than 20%. PMI costs typically range from 0.22% to 2.25% of your mortgage amount, depending on your credit score and total loan amount.

Get Your Credit Mortgage-Ready

Before applying for a conforming loan or any other type of mortgage, consider improving your credit to help your odds of loan approval and secure lower interest rates. Start by reducing your debt and paying your bills on time each month. Avoid making large purchases with credit in the months before you plan to apply for a mortgage, and don’t apply for new credit since the inquiry could temporarily lower your credit score.

It’s also wise to get a free copy of your credit report and FICO® Score to see where your credit stands. Review your credit report to ensure there’s nothing that could hurt your chances of approval. By improving your credit before applying, you can enhance your chances of loan approval with more favorable loan terms.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your options and find the best loan for your situation.

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