What’s The Difference Between A Conforming And Non-Conforming Loan?

When you’re ready to buy a home, there are a few key features to look for in a mortgage lender. You’ll want to work with a mortgage loan officer who will guide you in selecting the most appropriate home loan for your needs, and will present you with the lowest rates and competitive terms based on your credit worthiness. It’s also important to work with a mortgage lender that offers customized solutions based on your specific financial needs and home-buying objectives, along with a seamless loan approval process, and an on-time, in-house closing.

However, just as not all homes you consider in your home search involve the same features, or provide the best fit based on your needs, home loans differ, too.  Some homebuyers may be perfectly served with a conventional loan, for example, while other home purchases demand a different type of loan entirely.

Here’s a look at two common types of home loans to help you determine the right loan product for your home-buying needs: 

Conforming vs. non-conforming loans

Conforming loans are often backed by Fannie Mae or Freddie Mac. They typically have slightly lower interest rates compared to non-conforming loans, may include smaller down payments, and require that a borrower meet less-stringent financial criteria for approval. Because of some programs intended to make home buying more financially feasible, first-time homebuyers are especially good candidates for conforming loans. For example, Fannie Mae recently implemented a program designed for new homeowners, and those who have not owned a home in the last three years. In the program, first-time homebuyers might qualify to purchase a new home with a down payment of just 3 percent of the purchase price, if the home will be a primary residence.

Limits on Conforming Loans

Because conforming loans are intended to finance a very specific type of property for a specific type of borrower, there are limits to the loan amount. For a one-unit property (like a single-family detached home, a town home or a condominium) in the greater Chicago area, the maximum conforming loan amount is $417,000. If the property includes multiple units, the loan limits are:

• $533,850: Maximum loan amount for two-unit properties
• $645,300: Maximum loan amount for three-unit properties
• $801,950: Maximum loan amount for four-unit properties

What’s a non-conforming loan?

Because conforming loans have specific criteria that not all homebuyers will meet, non-conforming loans suit different financing needs.

Single-unit home purchases that exceed the $417,000 conforming loan limit in the greater Chicago market, for example, may be financed through a non-conforming loan product, sometimes called a jumbo mortgage loan.

Yet, higher loan amounts may present greater risk to the lender. As a result, non-conforming loans typically require the borrower to invest a higher down payment (which may be up to 20 percent of the home’s purchase price). They also tend to follow stricter underwriting guidelines borrowers must meet for approval, compared to other loans. For more info on loan programs, contact us below.