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Three Fundamentals of the Conforming Loan

Clearly divide into two very distinct categories, a conventional mortgage is either a “conforming” or “non-conforming” loan. With a conforming loan, it adheres to stringent guidelines of underwriting by Fannie Mae and Freddie Mac. Moreover, a conforming loan is less risky to a lender than a non-conforming loan. Additionally, a conforming offers the lowest interest rates. There are three essential requirements of a conforming loan:

1. The borrower must have minimal debt. The first focal point most lenders review is a consumer’s debt ratio. The basis of their decision is contingent upon whether the monthly regular expenses (back end ratio) do not exceed 25 to 28 percent of a person’s of gross monthly income.

The expenditures include mortgage payments, property taxes, insurance. All monthly expenses, (credit card bills, auto loans and any other installment payments) should not be more than 36 percent of a person’s gross monthly income also known as the ‘back end ratio.’ In extenuating circumstances where the borrower has exceptional credit or has a higher down-payment, the ratios can sometimes be increased.

2. A positive credit rating is another determining factor in the loan application approval process. A prospective borrower must be current on payments. Moreover, lenders will require a minimum credit score on the consumer rating data report, known as the “FICO.” (A low credit score can incur a higher interest rate for home loan financing)

3. Monies needed for the mortgage closing. New want-to-be homeowners are required to have a certain percentage of the down payment of the home they are purchasing. Depending on the lending institution, the pre-requisite for the down payment can range upwards starting at five percent.

Generally, 20 percent of the purchase price is the norm and ideal. In addition, although lenders bend the rules: a proof of where the down-payment funds were derived along with the proof of a few months of cash reserves in the bank are other stipulations of a conforming loan.