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Conforming vs NonConforming Mortgage PDF Print E-mail
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Written by Tamara Schmitt   
Tuesday, 20 December 2005
There are two general categories into which mortgages fall- conforming and non- conforming. Both are viable loan programs, depending on the borrower's needs and qualifications.

 

Conforming mortgages derive thier name because they "conform" to Fannie Mae (FNMA) or Freedie Mac (FHLMC) standards. Fannie Mae (FNMA) is a private, shareholder-owned company that works to make sure money is available for home loans. FNMA stands for Federal National Mortgage Association. Fannie Mae does not lean money directly to home buyers. Instead, they work with lenders to make sure they don't run out of mortgage funds, so more people can achieve their goal of homeownership.

Freddie Mac (FHLMC) is a stockholder-owned corporation chartered Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership. FHLMC stands for Federal Home Loan Mortgage Corporation. Both have guidelines that must be met to obtain funding.

Non-conforming mortgage loans are entirely different. You may qualify for a mortgage loan through the non-conforming world even if you do not conform to the above standards. With nonconforming loans, each lender sets their own criteria to determine eligibility. Lenders have different "niches" they try to serve. Some may be to provide riskier loans at higher interest rates for poor credit applicants. Others may be to offer access to more cash for those with better credit. Some specialize in providing loans to self employed borrowers. In any case, each lender makes their makes their own rules and they are not bound by any federal charter. This gives extreme flexibility in the loan products they are allowed to offer.

Apart from structural differences between the companies offering each type of loan, there are major differences in the features and benefits of the two loan categories as the chart below highlights.

 Conforming

Non-Conforming
 Typically, only for customers with good credit  For customers with good or bad credit
 Rigid standards (e.g. max of 95% rate/term & 90% with cash out) Much more flexible standards (e.g. 125% cash out)
 Fewer Programs:
-  Mostly fixed rates
-  A few ARMs and balloons
-  Full doc only
  Many programs, e.g.:
-  Fixed, ARMs, balloons
-  100% LTV
-  Alternative income documentation
-  Interest only
 Strict restrictions for cash out  Few restrictions for cash out
 Mortgage insurance for loans over 80% LTV  No mortgage insurance (usually)
 No unusual Property types (no mobile homes)  Most property types (e.g. mobile homes)
 No prepayment penalties  Prepayment penalty options to lower the rate
 Automated underwriting  Automated or manual underwriting
 Primarily rate-focused  Primarily benefit-focused

Last Updated ( Wednesday, 23 August 2006 )
 
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