A key differentiation to make in the loan process is between conforming loans and non-conforming loans. You will fit into one of these two categories and it will affect the interest rate you are eligible for.
Conforming Loan
A conforming loan (often times referred to as a conventional loan) follows guidelines establishd by industry giants Fannie Mae and Freddie Mac. Guidelines for these loans include various criteria for borrowers such as credit scores and income requirements, but are most commonly associated with loan amounts. Typically, a conforming loan offers better interest rates as the risk perceived to the lending institution is lower. The chart below shows 2007 guidelines.
| |
2007 Conforming Loan Limits |
| One-unit |
Two-family |
Three-family |
Four-family |
Seconds |
| Continental U.S. |
$417,000 |
$533,850 |
$645,300 |
$801,950 |
$208,500 |
| AK, HI, Guam, U.S. Virgin Islands |
$625,500 |
$800,775 |
$967,950 |
$1,202,925 |
$312,750 |
| Information taken from the Fannie Mae website (pdf link). |
Non-Conforming Loan
A secondary market exists for borrowers that are unable to meet conforming loan criteria. These are considered non-conforming loans and make up the majority of loans in the U.S. Reasons for seeking out a non-conforming loan include a number of factors:
- Loan amount exceeds limits set above (see jumbo loans)
- Imperfect credit (see subprime and alt-a programs)
- Employment status or type
- Property/Residence (secondary and investment homes)
- Commercial Loans
- Income Ratio
While the types of mortgage loans are largely the same whether it's a non-conforming or conventional loan, bigger differences can be seen in fees and interest rates. Because non-conforming loans are perceived to be riskier, you should expect to pay a higher interest rate.
