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Conforming Mortgages
Conforming and Non-Conforming Mortgages
A Conforming Loan is a loan that meets guidelines set forth by a Government Sponsored Enterprise (GSE). The two largest GSEs are Fannie Mae and Freddie Mac. These two agencies purchase most of the home loans issued in the United States. The criteria they set forth on mortgages they'll purchase include debt to income ratio limits, documentation requirements and loan amount caps. The loan amount cap as of 2006 was $417,000 or $625,500 in Alaska, Hawaii, Guam and the U.S. Virgin Islands. Anything that exceeds this or doesn't meet other requirements set forth by Fannie Mae and Freddie Mac are considered Non-Conforming or "Jumbo" Loans and thereby aren't purchase by either entity. This makes Conforming Loans more liquid and, consequently, more valuable to lenders so they typically have lower interest rates attached to them.
Non-Conforming (or Jumbo) Loans are loans that don't meet the set criteria put forth by Fannie Mae and Freddie Mac. Non-Conforming Loans and portions of Conforming Loans that aren't purchased by Fannie Mae or Freddie Mac are usually purchased by insurance companies and banks. The two typical classifications of Non-Conforming Loans include A-Paper and Subprime. A-Paper Non-Conforming Loans describes a mortgage where the borrower meets the following criteria:
- The borrower's credit score is greater than 680.
- At least 20% equity remains in the home (the loan is 80% Loan to Value).
- Two months of mortgage payments are kept in reserves.
- The borrower's debt to income ratio doesn't exceed 35%.
- The borrower fully documents their income and assets.
Subprime loans, also called B-Paper, Near Prime or Second Chance Loans, are geared towards those with less than perfect credit scores. They are more risky in nature due to poor credit history, higher interest rates and reduced liquidity of being a Non-Conforming Loan.