Thanks to the available home mortgage options, buying a new home in a state like Texas is easier than you think. Whether you’re looking for a loan with zero down payment or a poor credit score, there’s a little something for every home buyer out there. 

In today’s post, we have decided to talk about the type of loan which can be truly profitable for borrowers with excellent credit history.

Yes, you guessed that right. We’re talking about conforming loans. What are conforming loans? How do they work? What are the pros and cons of applying for this type of loan? We’re going to discuss everything right here in this post. So stay tuned and keep reading…

Conforming loans explained

Simply put, a conforming loan is a type of mortgage that satisfies funding criteria suggested by Freddie Mac and Fannie Mae and the “dollar limits” set by FHA. 

It is essential to understand that this type of loan cannot exceed the set limit, which varies annually. For instance, the current conforming loan limit for most US states is $548,250. 

The biggest advantage of conforming loans is that they offer lower interest rates.

How do they work?

Both FHA and Fannie Mae are government-backed agencies that act as drivers of the US loan market. These entities have created and published certain loan acquisition guidelines that help potential home buyers know whether they can qualify for a home mortgage. 

You can also contact any experienced mortgage company like https://www.reliancemortgage.com/ to know more about how this type of loan actually works in the mortgage market. 

Conforming loans vs. non-conforming loans

The name says it all. The conforming loans must conform to the criteria set by FHA and Fannie Mae. The purchase criteria revolve around 3 elements, including:

• The size of the loan/limit 
• The property type
• The applicant’s credit score and ability to pay a downpayment

These loans are more likely to be cheaper due to their lower interest rate requirement. 

Non-conforming loans may be held by the lender or sold to some other mortgage lender. These loans are quite expensive and less common than conforming loans. 

Because these loans are expensive and have higher interest value, there is potentially no limit on the loan size. 

Is there any difference between a conforming loan and a conventional loan?

Conforming vs. Conventional – Many people confuse these two terms. Sure, they do have some kind of influence over each other. But these are two entirely different terms. 

Conventional loans are not supported by the Government. Any loan that is offered through a private lender comes under the category of conventional loans. 

Conforming loans, on the other hand, are the ones that are supported by government-approved agencies like the FHA or the US Department of Veteran Affairs. In practice, all conforming loans are conventional, but you cannot call all conventional loans conforming. 

Conforming loan limits – 2021

As discussed above, the conforming loan limit for most US states is $548,250 (single-family dwelling). But it can reach up to $1,054,500 depending upon the size and area of a home. 

Here’s a quick loan limit breakdown for 2021…

• Single-unit: $548,250
• Double-unit: $702,000 
• Three-unit: $848,500 
• Four-unit: $1,054,500 

Conforming Loans – Pros & Cons

Pros

Manageable loan limits

The structure and guidelines of conforming loans encourage homebuyers to invest in affordable properties. This reduces non-payments and eventually the risk of defaults and foreclosures. 

Affordable interest rates

The biggest one! Conforming loans are more affordable because of their lower interest rates. 

Lower down payment requirements

While the minimum down payment requirement for conforming loans is at least 20%, Fannie Mae and Freddie Mac loans valued at 97% or higher have the potential for a smaller down payment of as low as 3%. 

Cons

Confined loan limits

You’ll have to stick to the loan limits defined by the concerned authorities. If you’re willing to buy a high-value or luxury property, you may have to look for alternative loan options.  

Require good credit and DTI scores

When it comes to conforming loans, your chances of getting approval mainly depend on your credit and DTI scores. Borrowers with poor credit scores and lower DTI may have a hard time getting their loan requests approved. 

How can you get a conforming loan?

In order to get a conforming loans, you’ll need to fulfill the guidelines set by Fannie and Freddie. These include:

• a minimum of at least 620 credit score
• a DTI score of 45 and above
• a verifiable income source

Can you still get a loans if you can’t meet the standards for conforming loans? 

Well, it depends. There are plenty of other mortgage plans available for borrowers who don’t fit the conforming loans criteria. 

In that case, we’d suggest you get in touch with a reliable Dallas mortgage company to discuss the available options.