Since mortgages can take up to 30 years to pay off, mortgage lenders typically can’t afford to wait for a full mortgage term to get that money back; they need cash flow to continue to lend new mortgages to home buyers.
To provide that cash flow, investors purchase mortgage notes from lenders. The investor may keep a small number of mortgages in its portfolio, and the rest will be securitized and sold on the bond market.
The largest buyers of conventional mortgages are Fannie Mae and Freddie Mac. These two companies are government-sponsored enterprises. This means that, while they operate independently of the government, they are subject to some supervision that ensures that they’re operating in a responsible way. The government agency that supervises Fannie and Freddie is called the Federal Housing Finance Agency.
Fannie and Freddie have standards for the types of mortgages they’ll buy, to ensure that the mortgage market is made up of creditworthy mortgages. If a mortgage fits within their standards and is eligible to be bought by one of these GSEs, it’s considered to be a conforming loan.
Non conforming loans are ineligible to be sold to Fannie Mae or Freddie Mac. When a lender makes a non conforming loan, they may hold it in their portfolio or sell it to a private investor. The most common type of non conforming loan is a jumbo loan.
Each year, the FHFA publishes limits for the maximum loan amounts for conforming loans. In most areas in the U.S. in 2021, you can’t get a conforming loan for an amount larger than $548,250. In some areas that have been deemed “high cost” (Los Angeles or New York City), the limit is $822,375.
You will need a down payment to qualify for a conventional loan. Though you can put as little as 3% down when you get a conventional loan, a lower down payment requires PMI (private mortgage insurance). With 20% down you can avoid paying PMI.
Our team of dedicated loan experts can answer any questions you may have regarding residential financing, whether you’re a first time home buyer, looking to refinance, or shopping for a second home. We are here to assist you.