If it’s the mortgage is either conforming or nonconforming may have a substantial effect on the speed and details of the mortgage. A prepared secondary market for conforming mortgages makes it easier for lenders to market originated mortgages and utilize the proceeds to fund extra mortgages. The definition of a conforming mortgage is primarily about the quantity of the loan.
Identification
A conforming mortgage is a loan which meets the size and criteria of their government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The GSEs purchase originated mortgages and repackage them to mortgage-backed securities, which are ensured by the companies and have indicated U.S. government financing. Fannie and Freddie are the primary sources of mortgage financing in the U.S. Mortgage lenders know they will have the ability to sell conforming mortgages to Fannie or Freddie.
Size
The main determination of whether a mortgage is adapting is the size of their loan. The Federal Housing Finance Agency (FHFA) sets the limitations on how big mortgages that the GSEs can purchase for securitization. The FHFA resets the loan limitations each year. From 2006 through 2010, the federal limit for a conforming mortgage was $417,000. The conforming limit in Alaska, Hawaii, Guam and the U.S. Virgin Islands was $625,500.
Exceptions
The American Retrieval and Reinvestment Act of 2009 authorized FHFA to allow greater conforming limitations in areas with greater average home costs. FHFA issued a note of 250 counties which have greater compared to standard conforming limit in 2009 and the very same limitations applied in 2010. In the selected areas, the conforming loan limit is up to $729,750 to get a single-family home. The loans produced in these areas above the standard limit but under the enlarged limit are often called superconforming or conforming jumbo loans.
Factors
A conforming mortgage must also meet with the underwriting criteria of Freddie Mac and Fannie Mae. The criteria incorporate loan-to-value limitations, minimum fico scores and debt-to-income guidelines. Mortgage lenders are able to offer home loans to mortgage applicants that meet the criteria set by the GSEs. Since the fiscal crisis of 2007, it’s difficult to get a home buyer who doesn’t meet the criteria for a conforming loan to qualify for a home mortgage.
Outcomes
The ability of lenders to market adapting loans to the GSEs rather than have a market for nonconforming loans has caused a substantial difference in interest rates between conforming and nonconforming loans. The nonconforming market is made up primarily of jumbo loans with numbers over the conforming limits. For a comparison, in August 2010, Wells Fargo Bank quoted adapting, 30-year fixed-rate mortgages at 4.50 percent and adapting 5/1 hybrid ARM mortgages at 2.875 percent. Nonconforming jumbo loan rates to the exact same mortgage types have been 5.125 percent and 4.25 percent, respectively.