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Conforming Loans

Conforming Loans in Colorado

The decision to buy a home comes with a fair share of particular terms in the real estate and loan market. Conforming loans is one of these terms as it is significant towards making the right choice in purchasing a home. A conforming loan is one which meets the limits as set by the Federal Housing Finance Agency. It also follows the tenets as set by Fannie Mae and Freddie Mac to buy the mortgage from the lender. Not all conforming loans are purchased by this agency, though, a large percentage of loans are assisted in one way or another by these entities.  It is worth noting a conforming option is a form of a conventional loan which means the federal government does not back them in the same way as FHA mortgages.

Conforming loan limits

This year, the Federal Housing Financing Agency stated an increase of the limit to $484,350 from $453,100 in 2018/ the limits are set according to a survey which considers the growth or decreases within the average prices of houses. As the prices go up, so does the conforming loan limit. That means housing would be reachable for the lower and middle-income purchasers. There are certain high-cost areas which have a high limit, however. For example, if one lives in high esteem areas such as San Francisco or New York, then the limit could go as high as $726,525. There are special considerations for a few states like Alaska, Guam, Hawaii, and the Virgin Islands.

Basic requirements

Lenders follow specific criteria to qualify the borrower of conforming loans. For starters, the lenders have to evaluate the debt to income ratio of the borrower to make sure they meet the standards as established by both Freddie Mac & Fannie Mae and the FHFA. The majority of lenders maintain the borrower should have a debt to income ratio of 28% at the maximum. That means the housing expense should not be 28% more than their gross monthly income. The lenders also have to attain and verify financial documents showing the borrower can repay the mortgage obligation. That means the lender has to request the required paperwork to make sure the borrower can afford this loan. These financial documents may include w-2 forms for the previous few years and the recent stubs illustrating year to date earnings not to mention the tax returns available for the earlier years before applying for the loan.

How the conforming loan works

The borrower seeks a loan in accordance with the guidelines approved by the FHFA. The lender is aware that Freddie Mac or Fannie Mae may purchase the loan at a later time, so they are inclined to lend it out. These quasi-governmental entities initiated the standardized regulations to which the mortgages have to conform. The term conform refers to the mortgage amount which has to fall within a particular limit as given by the FHFA. This has already been mentioned as the agency set this at $484,350 for 2019. The Housing and Economic Recovery Act (HERA) claims the base conforming loan should be adjusted for Fannie Mae and Freddie Mac to illustrate changes within the average American home rates.

Benefits of conforming loans

The primary advantage of the conforming loan is they usually offer loan a lower interest rate as compared to the non-conforming loans, and that would mean a lower mortgage payment and less revenue spent throughout the loan. The other benefit is once the borrower has met the requirements of the conforming loan, getting approved may be easier considering the bank can sell the loan. Similarly, the guidelines as provided by Freddie and Fannie make it, so the lenders have to follow particular standards when issuing the loan. There should still be some care to get to know all of the terms and conditions, though.

Special Considerations

The FHFA, which is in charge of setting the limits, has regulatory control to ensure Freddie Mac and Fannie Mae up-hold their mandates to promote ownership of homes among the lower and middle-class population.  The institution uses October to October percentage change in the average housing prices within the monthly interest rate survey to just limits for conforming loans for the next year.