Conforming Loan -A non-government sponsored loan with low down payment options

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Conforming loan is a sub-category of a conventional loan that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of set by FreddieMac and FannieMae.

For borrowers with excellent credit, a conforming loan is advantageous due to its low interest rates and lower down payment compared to other conventional loans.

Conforming loans vs. conventional loans

Conforming loans are frequently confused with conventional loans, but the two terms aren’t interchangeable:

• A conventional loan is any mortgage that doesn’t provide a government guarantee to compensate the lender if the borrower defaults.
• A conforming loan is a type of conventional loan.
• Conforming loans are mortgages that meet the requirements to be purchased by Fannie Mae or Freddie Mac. These loans are the most common type of home loan, and you’ll find that most lenders offer them.
• The limit is $647,200 on most of the US territory, and up to $970,800 in areas with high home values, such as Hawaii and parts of California and New York.
• Tip: You can check the conforming loan limit in your county using this FHFA map.

Advantages of Conforming Loans

Conforming loans are advantageous due to their low interest rates and lower down payment. For first-time homebuyers taking out a conforming loan can get approved for a mortgage with a down payment as low as 3%

The borrowers with a low down payment may be required to purchase  a MIP (mortgage insurance premium). MIP the cost of which varies according to borrower’s loan terms which cost is about 0.85% of the loan amount per year.

Qualifying Criteria for Conforming Loans

 Borrowers must have a:

• Down payment of at least 3%
• DTI (debt-to-income) ratio no higher than 45%
• Credit score of at least 620
• Employment History
• US lawful residency

Conforming Loans Offer Greater Consumer Protections And Lower Interest Rates

Many consumers benefit from conforming mortgages because of the lower rates and fees and the stability of the loan. If you’re thinking about buying a house, read our guide How to Buy a House to make sure you know everything there is to know about the process

Lenders also prefer to work with conforming loans, as they can be packaged easily into investment bundles and sold in the secondary mortgage market. This process frees up a financial institution’s capacity to issue more loans, which is how it makes its money.

How much should I use for a down payment?

There are costs and benefits to any option, including those with low down payments. You should carefully consider your options and discuss your plan with a professional.

Talk to one of our loan specialists today to come up with a customized solution that best fits your needs and budget.

Cost of a Lower Down Payment

Low or no down payment programs have two primary costs that result in a higher monthly payment:

• Higher interest rates
• Higher mortgage insurance premiums.

Mortgage insurance can be removed once sufficient equity is produced. For example, if the property shows at least 20% equity in a few years, the mortgage insurance can be refinanced away.

Benefits of Lower Down Payments

Though the disadvantages of low down payments seem serious, there are also advantages. Take time to weigh the two and assess which is the best for you.

The chief benefits of lower down payment include the following:

• Less money out of pocket at the time of purchase.
• Higher rate of return. Your property’s appreciation will be the same whether you put 3%, 5%, or 20% down. In fact, your rate of return actually decreases as you make a larger down payment, as discussed below.
• Opportunity cost. In some cases, the smart investor can make more money from available cash by placing it in other investments.

During the first few years of the mortgage loan, the bulk of your monthly payments go towards paying interest – which is usually tax-deductible. So you get quite a bit of your monthly payments back at the end of the year in the form of tax deductions.

Personal Consideration

Carefully consider the amount of money that you want to put down. Your lender will qualify you for a certain level based on your income; however, that amount may be different from the level that you feel comfortable paying each month. You must decide what you can afford.

Talk to your loan officer at Premier Home Financing about the best situation for you.