Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for Americans.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announces new loan limits every year.
You may have noticed when you last shopped for mortgage rates that most lenders make a distinction between conforming and jumbo loans. The interest rate quoted on a conforming loan is usually 1/4 to 1/2 percent less than it is on a jumbo mortgage from the same lender.
A conforming mortgage is one that is packaged for resale on the secondary mortgage market to Fannie Mae or Freddie Mac, two quasi-governmental agencies that buy mortgages from cooperating lenders. Both agencies set limits annually on the size loans they'll buy. In 1999, the conforming loan limit was increased to $240,000 from $227,150 in 1998.
erence between the purchase price and the conforming loan limit.
First Time Tip: One way to bridge the gap between the conforming limit and a high purchase price--without resorting to a jumbo loan--is to use a combination of a first and second mortgage (often called "piggy-back" financing). Let's say that you're buying a home for $350,000 and you have enough cash for a 20 percent down payment of $70,000. This leaves $280,000 that must be financed. If you take out a conforming loan for $240,000, this leaves $40,000 that can be financed in the form of a second loan.
You'll pay a higher interest rate on a second mortgage than you will on a first mortgage. Currently, interest rates on seconds are running about 1 3/4 percent higher than they are on conforming mortgages. So, if the rate you're quoted on a new first mortgage is 7 percent, the rate on the second might be 8 3/4.
The monthly payments on second mortgages from institutional lenders are amortized over either 15 or 30 years. In both cases the loans are usually due in 15 years. If you go with the 30-year amortization schedule, you'll have to make a balloon payment in 15 years, if you haven't sold the home or refinanced by then. A balloon payment is a final payment that is significantly larger than the monthly payment. A loan that's amortized over 15 years will be paid in full at the end of 15 years.
A loan that's amortized over 15 years will have higher monthly payments than a loan that has a 30-year amortization. Higher monthly payments make it harder to qualify.
Piggy-back financing makes the most sense financially for buyers who intend to pay the second mortgage off early. For example, suppose you're selling another piece of property, but you won't have the proceeds from that sale before you close on the purchase of your new home. When the sale of the other property goes through, you can pay off the second mortgage and be left with a low-interest rate conforming first mortgage.