Conforming vs. Non-Conforming Mortgage Loans: Which One’s Better?
Non-profit research organization the Urban Institute recently described the 30-year fixed-rate mortgage as ‘the bedrock of the US housing finance system.’ This type of mortgage falls under two classifications: conforming and non-conforming. Both types of home loans have their own unique benefits and drawbacks—but which one’s better?
Here’s a summary of how each type of mortgage works as well as their respective benefits and drawbacks.
Conforming Home Loans
What Are They?
Conforming mortgage loans are those that conform to the limits set by the Federal Housing Finance Agency (FHFA), the Federal National Mortgage Association (Fannie Mae), and the Home Loan Mortgage Corporation (Freddie Mac). In other words, these loans are federally insured.
Currently, the limit for one-unit properties in most parts of the country is $647,200 (known as the ‘conforming loan baseline limit’). In high cost areas like New York where the median value of a home is more than 1.15 times the nationwide baseline limit, the limit tops out at $970,800.
Conforming mortgage loans benefit both the borrower and the lender. One of the main benefits of this type of loan to borrowers is the low interest rate. For instance, the APR on a 30-year fixed rate conforming mortgage as of October 2022 is 6.91%. In contrast, opting for a non-conforming loan can subject you to a much higher APR. Why? Because it’s riskier for mortgage lenders to issue non-conforming home loans (more on that later!).
The primary benefit of conforming mortgage loans to lenders pertains to risk. Conforming mortgage loans are federally insured, which means the mortgage lender has the right to demand compensation from the FHFA, Freddie Mac, or Fannie Mae should the borrower default on the loan. This is advantageous to borrowers too because they’re more likely to get approved for a conforming mortgage loan quickly (provided they meet the eligibility requirements). Why? Because mortgage lenders prefer giving out this type of loan due to the risk compensation they receive!
One of the primary drawbacks of conforming home loans is the low limit. Unfortunately, it’s impossible to finance a single-family home that’s worth more than the baseline limit described earlier in this article with a conforming home loan.
Another major disadvantage of this type of loan pertains to the requirements. Conforming home loans are only available to applicants with valid documents such as W2 forms and tax returns. If the borrower doesn’t have access to these documents, they must seek an alternative such as a bank statement or no W2 loan (both of which are known as ‘non-qualified mortgages’ that don’t meet the conforming standards set by Fannie Mae and Freddie Mac).
Non-Conforming Home Loans
What Are They?
As the name suggests, non-conforming mortgage loans don’t conform to any federal body or requirement. In other words, there’s no limit to how much you can borrow if you take out a non-conforming mortgage loan—although there are several caveats that we’ve discussed in the ‘drawbacks’ section below.
The key benefit of non-conforming mortgage loans is their limitless nature. If you’re seeking a high-value home loan to finance prime real estate, non-conforming loans are ideal.
Another benefit of this type of loan pertains to eligibility. If you don’t have access to the documents required to apply for conforming mortgages, all you’ve got to do is visit a mortgage lender that specializes in non-conforming loans to obtain financial assistance. There are numerous types of non-conforming loans you can access depending on what documents you have such as no W2 loans for those without W2 forms.
Non-conforming mortgage loans often come with unfavorable terms to compensate the lender for taking on added risk. Think about it from the mortgage lender’s perspective—would you give a large loan to someone who doesn’t have tax returns and/or a W2 form? Chances are you’ll only be willing to do it if you could charge them a high interest rate to compensate!
This is why the interest on non-conforming mortgage loans is typically higher than on conforming mortgage loans. Moreover, non-conforming mortgage loans require sizeable down payments and several other documents to prove the borrower’s eligibility including bank statements and credit reports.
Which One’s Better?
Ultimately, whether conforming mortgage loans are better than their non-conforming counterparts depends on your individual circumstances. For example, if you’re a freelancer who simply cannot access W2 forms, you’ll have to settle for taking out a non-conforming loan. On the other hand, if you’ve got a low credit score but a history of timely tax returns and a W2 form, you’ll have a solid chance at securing an FHA (conforming) loan.
If you qualify for both conforming and non-conforming mortgage loans but you’re unsure which one to pick, we recommend speaking to a mortgage lender. If you’re honest about your unique circumstances and let them know which documents you’re able to produce should you apply for a mortgage, they’ll let you know what type of home loans you’re eligible for.
Atlantic Home Capital Guides Clients Through the Process of Applying for Conforming and Non-Conforming Home Loans in New York
Keen to speak to seasoned mortgage consultants about applying for conforming or non-conforming mortgage loans in New York? If so, we’re ready to help you at Atlantic Home Capital!
We’ve helped countless clients apply for jumbo non-conforming mortgage loans to finance everything from luxury mansions to state-of-the-art condos. We also provide numerous conforming home loans such as FHA loans for first-time homebuyers and VA loans for military personnel and their surviving spouses.