Conforming Mortgage Lending Guidelines
Conforming mortgage guidelines govern most loans in the United States.
- Conforming loans are bought from lenders and sold to investors.
- They must meet guidelines established by Fannie Mae or Freddie Mac.
- Conforming loans are Qualified Mortgages (QMs), which means the government considers them among the safest for borrowers.
You can find conforming loans at banks, credit unions, mortgage companies, and mortgage brokerages throughout the US.
What are Conforming Loans?
Conforming loans get their name because they must conform to the underwriting guidelines of Freddie Mac and Fannie Mae. These two huge corporations buy loans from mortgage lenders, group them into pools of similar loans, and sell shares called mortgage-backed securities or MBS) in those pools to investors. It’s very similar to the way a company sells shares on the stock market.
The reason the loans must conform to these guidelines is so that one loan will be pretty much like another. An investor who buys a share of these loans must be confident that her share is as good as anyone else’s.
Note that conforming loans are not the same as conventional loans. Conventional loans are all mortgages that are not backed by the federal government. Any loan that is not a VA, FHA or USDA mortgage is a conventional loan. All conforming loans are conventional loans.
But all conventional loans are not conforming loans. There are many lenders offering mortgages that don’t meet Fannie Mae or Freddie Mac guidelines. They might be larger than the limits of conforming loans, or have more liberal underwriting guidelines. Conventional loans that don’t meet Fannie Mae or Freddie Mac guidelines are called non-conforming loans.
Conforming Mortgage Minimum Down Payment
The minimum down payment for a conforming mortgage depends on the borrower’s credit score, debt-to-income (DTI) ratio, loan type, and property type.
- DTI is your total debt payments, including your potential housing payment, divided by your monthly gross (before tax) income.
- The loan type refers to the term (for instance 15 or 30 years) and the interest rate (fixed or adjustable)
- The property type refers to the construction (single-family traditional build, manufactured home, multi-unit property, and condominium or co-op) and the use (primary residence, second home or investment property)
The matrix below shows how the combination of credit score, reserves and DTI impact the required down payment.
Benefits of Conforming Mortgages
Conforming mortgages are widely available and easy to shop for. That keeps interest rates low. Conforming mortgage lenders use automated underwriting systems (AUS) and applicants can often get an underwriting decision in minutes.
There are many loan programs including special ones with 3% down payments and discounted mortgage insurance for eligible applicants. You can also find programs for manufactured homes, home construction, second homes, and investment property.
Conforming mortgage loan limits are often higher than those of FHA mortgages.
Mortgage Insurance Guidelines
Borrowers who put less than 20% down when buying a home must purchase private mortgage insurance (PMI) when they borrow with a conforming mortgage.
The mortgage insurance premium depends on the loan type, down payment, and borrower credit score. Mortgage insurance for government-backed loans, on the other hand, costs the same regardless of credit score. Borrowers with good credit can usually pay less (sometimes a LOT less) when they finance with a conforming loan instead of a government-backed loan.
In addition, government-backed loans require a funding fee or mortgage insurance for all borrowers. No matter how big the down payment. But conforming loans do not require mortgage insurance for down payments of at least 20%.
Borrowers can choose to pay their PMI monthly, or they can pay an upfront lump sum and keep the monthly payment lower. There is also an option to pay a higher interest rate and let the lender pay your mortgage insurance for you. That’s called lender Paid Mortgage Insurance or LPMI.
Ask an Expert
Borrowers seeking a national lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The Team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.