What Is a Super Conforming Loan?
To understand what super conforming loans are, you first need to understand what are conforming loans. A conforming loan is a mortgage that meets the requirements set by the government-sponsored enterprises, Fannie Mae and Freddie Mac. In other words, conforming loans are home loans whose account doesn’t exceed a certain dollar limit set by Fannie Mae and Freddie Mac.
It is the most common type of home loan that is offered by most lenders. They are beneficial for borrowers with great credit scores due to their low-interest rates.
On the other hand, super conforming loans are referred to as high-cost or high-balance loans. They were created by Fannie and Freddie to accommodate buyers in areas where market demand has led to high home prices.
Highlights of high balance super conforming loans
- It offers higher limits than a standard conforming loan
- It is used to secure a 1 to 4 unit property
- The loan carries lower costs than that of a Jumbo Loan
- Available for fixed and adjustable-rate mortgages
Conforming loans vs. Super loans – How do they work?
The Federal Mortgage National Association (aka, FNMA or Fannie Mae) and Federal Home Loan Mortgage Corporation (aka, FHLMC or Freddie Mac) are federally backed home mortgage companies that drive the market for home loans. The corporations buy mortgages that banks and other lender unions give out.
What happens is that banks, credit unions, and other lending agencies purchase properties on their behalf and transfer the ownership to the borrowers. In return, borrowers promise to pay back the lender with interest. It means that Frannie Mae and Freddie Mac works as secondary market makers as mortgages are not issued by them.
These government agencies have set the maximum loan amounts, income requirements, borrowing limits, suitable properties, and down payment. In other words, conforming rules set for how to qualify for a mortgage and much the borrowers can borrow. New loan limits are announced by the corporations each year to reflect the change in the national average cost of a home. The borrowing limit means that you can’t borrow the maximum amount set by Fannie Mae and Freddie Mac.
Both super loans and conforming loans offer the same guarantees to the lenders. However, super rates are usually available in fixed rates or adjustable rate forms. With certain programs, the down payment is as low as 5%. The jumbo loan limits can range up to $ 2 million, whereas the super loan limits cannot exceed the limit of the high-cost area that the property is located in.
Pros of conforming loans
The primary benefits of conforming loans are that they offer adjustable interest rate options and lower monthly mortgage payments.
Let’s take a look at other benefits of conforming loans:
- Easier to qualify
- Secured and guaranteed by Fannie and Freddie Mac
- Available at lower interest rates
- Lower down payment
- Available for people with credit scores of 720
Cons of securing conforming loans
- If you need more money than what FHFA (The Federal Housing Finance Agency) allows, you will have to secure a jumbo loan
- People who have less than 20% of the down payment have to pay PMI, which gets removed after earning 20% equity in the home.
Pros of high balance (AKA super loans)
- Down payments can be as low as 5% for some programs
- It offers higher limits than standard conforming loans
- It’s available for both fixed and adjustable rates
Cons of super loans
- It offers a stricter borrowing limit in comparison to jumbo loans
What is the minimum down payment for a conforming loan purchase?
As we discussed earlier, the minimum down payment required to apply for a conforming loan is 3%. Private mortgage insurance (PMI) is required for down payments of less than 20%. It gets removed when you gain 20% equity in your home.
2021 conforming loan limits
The baseline conforming loan limit for a single unit property in most of the U.S in 2021 is $584,250. Borrowers can get conforming loans for up to $822,365 if they are looking for a property in high cost areas where the median costs exceed this number.
How do I qualify for a conforming loan?
To apply for a conforming loan, borrowers must have a:
- Credit scores between 620 to 700
- Down payment of at least 3%
- Debt to Income (DTI) Ratio no higher than 45%
- Loan amount falls under the conforming loan limit by Fannie Mae and Freddie Mac
- 97% maximum loan to value
Conforming loan vs. Non-conforming loan
A conforming loan is a conventional loan that meets the guidelines set by Fannie and Freddie. These loans are secured, guaranteed, and protected. The guideline set by the corporations includes minimum down payment, suitable properties, and maximum loan amount.
On the other hand, non-conforming loans don’t meet the standards set by Fannie and Freddie. They are risky but not overly complex. Non-conforming loans don’t conform to GSE guidelines, which makes them hard to sell and extremely risky for the lender. You can think of a non-conforming loan as a higher loan with higher limits and higher interest rates.
Conforming loans generally require a less credit score than non-conforming loans. People who want to buy a property in a high cost area mostly consider going with a non-conforming loan.
The biggest benefit of non-conforming loans is that they allow you to afford a more expensive home. They are better for people who fall outside of the civilian middle class. The biggest drawback to a non-conforming loan for lenders is that they can’t sell non-conforming loans to Fannie Mae and Freddie Mac to free up their cash.
What are jumbo loans?
Loans that exceed the limit of conforming loans are called jumbo-conforming loans. Jumbo loans are non-conforming loans that fall outside the conforming loan restrictions. Jumbo loans and non-conforming loans are basically the same.
They are used to purchase properties in high cost areas. It is the category that was created by the Economic Stimulus Act of 2008. The interest rate on jumbo loans is significantly higher than conforming loans.
Jumbo loans carry greater risk because they are not guaranteed and secured by Fannie and Freddie. The value of a jumbo loan varies from state to state and country to country. A jumbo loan comes with a variety of terms and is either available at a fixed rate or adjustable interest rate.
Pros of jumbo loans
- Allows you to borrow more so you can buy the house of your dream, which otherwise might seem impossible.
- Unlike super loans, the loan limit can range up to $2 million
Cons of jumbo loans
- Higher interest rate than a conforming loan
- Higher closing costs
- Borrowers need to have a credit score of 700 to get a one or two-unit property
- Not secured for lenders
- Borrowers need to demonstrate that they have substantial personal financial assets
- Requires you to put away 12 months worth of mortgage payments
What is the credit score required to apply for a jumbo loan?
- Candidates with a credit score of 700 are eligible to secure a one or two-unit property
- 720 credit score is required to get loans between $1 to $1.5 million
- People with a credit score of 740 can secure loans between $1.5 to $2 million
A final word
Conforming loans conform to the guidelines set by the government entities, Fannie Mae and Freddie Mac. In other words, to get a conforming loan, you have to fit within the guidelines set by Fannie and Freddie, which are specific but not at all strict and complicated. People who are not eligible to apply for a conforming loan should apply for an FHA loan.
People usually apply for a jumbo loan because it makes buying a luxurious home possible. Both conforming and non-conforming loans offer different perks and disadvantages, but there’s no denying that conforming loans are more secured than non-conforming loans.