A compliant loan is a mortgage that qualifies to be purchased by housing finance giants Fannie Mae or…
A compliant loan is a mortgage that qualifies to be purchased by the housing finance giants. Fannie Mae or Freddie Mac. If you are looking for housing, you have probably heard this term, along with others, such as non-conforming loan and conventional loan.
When choosing the right loan for your needs, you need to understand the characteristics of a compliant loan. Keep reading to find out what a compliant loan is and if it’s the right product for you.
What are the compliant loan limits for 2021?
The compliant loan limit in 2021 for single-family homes is $ 548,250. This is an increase from the limit of $ 510,400 set in 2020.
The limits are higher for multi-family properties. The ceilings in 2021 are:
– $ 702,000 for a two-unit property.
– $ 848,500 for a three-unit property.
– $ 1,054,500 for a four-unit property.
What is the compliant high balance loan limit for 2021?
Although most counties follow benchmarks, some areas with above average property values will have higher compliant loan limits.
High cost areas tend to be found on the west coast as well as in the northeast, Alaska and Hawaii. For a single-family home in these areas, the compliant loan limit in 2021 is $ 822,375.
Counties in these areas are permitted to obtain high balance compliant loans that exceed the benchmark limit. Loans conforming to the high balance must also follow the loan guidelines set by the Federal Housing Finance Agency.
You can find the compliant loan limit for your area here or talk to a mortgage advisor.
[Read: Best Mortgage Lenders.]
Compliant or Non-Compliant Loans: What’s the Difference?
As the name suggests, a compliant mortgage must meet or be compliant with the Freddie Mac and Fannie Mae buying criteria, including:
– The dollar limit of the loan amount set by the FHFA.
– The type of property.
– The down payment and credit history of the borrower.
When a loan exceeds the loan limits of the FHFA, it can be qualified as jumbo loan and cannot be purchased by Fannie or Freddie. Jumbo loans usually have stricter rules, such as a higher credit score or cash reserve requirements, compared to other types of mortgages because the borrower becomes more indebted.
Mortgages are also considered non-compliant when they do not meet Fannie Mae and Freddie Mac’s other purchasing requirements, says Mike Laffey, production manager at the Silverton Mortgage branch in Charlotte, North Carolina.
Fannie Mae and Freddie Mac use strict underwriting criteria including credit score and debt to income ratio guidelines, for loans they buy and sell in the secondary market. They allow lenders to offload risk and pass on better rates and terms to borrowers.
Is a compliant loan the same as a conventional loan?
Non-conforming loans are simply those that do not meet Fannie and Freddie’s requirements. Some people use the terms compliant loan and conventional loan interchangeably, but there is a difference.
A conventional loan is a loan that does not have government backing or insurance. Some of the government agencies that guarantee mortgages include the Federal Housing Administration, the United States Department of Agriculture, and the United States Department of Veterans Affairs.
[Read: Best FHA Loans.]
How to get a compliant loan?
You will need to follow the guidelines set by Fannie and Freddie to be eligible for a compliant loan. These include:
– A credit score of at least 620.
– A debt / income ratio of up to 45% – and 50% in some cases.
– A stable and verifiable income.
The debt-to-income ratio refers to the portion of your income needed to cover your monthly debt payments. If you earn $ 7,000 per month and pay $ 2,000 for your home loan and $ 1,000 for your other monthly bills, your DTI would be around 43%.
A simple income situation can also be helpful. “The way we audit income has to be very traditional,” says Laffey.
A W-2 showing stable income can make qualifying easier than if you have self-employment income or if you have changed jobs in the past two years. That’s not to say that freelancers or entrepreneurs can’t get compliant loans, but they might have to go through more red tape to get them.
If you can’t quite meet loan compliance standards, don’t worry, says Laffey. “There is a market and other programs available for people who don’t fit into that category. ”
[Read: Best VA Loans.]
Is a compliant loan good?
When you get a compliant loan, you are working within limits that the FHFA has deemed low risk.
A compliant loan can offer a lot if you meet the criteria for borrowing, says Laffey. “If you can do the pay stubs and the W-2s, and your credit and debt ratios are in line, you can end up on better terms” with a conforming loan, he says.
Most importantly, says Doug Leever, mortgage sales manager for the Tropical Financial Credit Union of South Florida, “Shop around and use a lender you trust.”
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