Conforming Loans

A conforming loan is a loan that is equal or less than the industry standard for loan limit guidelines, and is therefore eligible for Fannie Mae or Freddie Mac. This standard is set by Freddie Mac and Fannie Mae, as they are the two largest secondary mortgage lenders in the country. The amount is adjusted yearly to accommodate market conditions and for 2006 is $417,000 for most of the United States.

Conforming loans are made by private lending institutions such as banks, saving and loan associations, credit unions and mortgage companies who then intend to sell them on a secondary market to Fannie Mae or Freddie Mac. This re-selling of the loans reduces the lending institutions risk and this in turn reduces the interest charged by the institution. This reduction in interest charges reduces the monthly payments required and can make the difference between qualifying or not qualifying for a mortgage.

Advantages:

• The interest rates are lower, allowing more people to afford housing.
• The down payment requirement is minimal.

Disadvantages:

• There is a restriction on the size of the mortgage allowed. The limit is adjusted annually and is large enough to allow the purchase of a modest house in most of the country.
• The re-selling of the loan means that there are rigid requirements placed on the granting of the loan.

There are several factors that are used to determine if you qualify for a conforming loan. The most important of these are:

• Your Credit Report:
  Past performance in debt handling is seen as an indicator as to your ability to handle future debt and greatly impacts the decision on whether to grant you the loan or not. Any bankruptcy must be discharged for four years and your credit must have been re-established.
• Your Income:
  The amount of money you make and the length of time you have been making it both are factors in determining if you qualify. The amount must be sufficient to cover the loan payments and lenders like to see that you have been employed for at least two years.
• Debt To Income Ratios:
  This compares what you owe to what you earn. For a conforming loan your total debt load (principle, interest, taxes, mortgage insurance, loans, credit card payments etc.) cannot exceed 36% of your net monthly income.
• Loan-To-Value Ratio.
  This is determined by dividing the equity of the house by its market value. For example if you owe $140,000 on a house with a market value of $200,000 then the loan-to-value ratio is $140,000 / $200,000 or 70%. The lower this number the more mortgage options you have. For a conforming loan a down payment of three per cent is the minimum required, meaning that you have the maximum loan-to-value ratio - 97%.