If you’re in the market for a house, you’ll confront a dizzying array of terms that are well-known to real estate professionals, bankers and others. It all may be confusing jargon to you, however.
That puts you at a distinct disadvantage.
Buying a home is a major investment. You’ll be paying for it for years to come. Sometimes unscrupulous operators ensnare buyers with all kinds of tricks and gimmicks in the fine print of contracts, documents, loan forms and more. They like it when you are uninformed.
When buying a home, you should go into the transaction from a position of strength. That means a lot of things, but one of them is knowing the territory and being comfortable when discussing the various financial instruments that are part of big-item purchases.
A term you should be familiar with is conforming loan. What is it?
Every year, the federal government sets a limit on the size of loans it is willing to back up on behalf of mortgage lenders. A bank, for example, will not touch a home mortgage unless they have a solid backup plan in the event the borrower cannot pay the loan. That backup plan is a guarantee by the government to pay the mortgage if all else fails.
Fannie Mae and Freddie Mac are the government agencies that guarantee loans. If the loan falls within the limit or amount of what the government is offering, then it is a conforming loan.
The current conforming loan limit is quite high. It was set at $548,250. If the mortgage is lower or equal to that amount, it is a conforming loan. If the home loan is made for $600,000, for example, that would be a non-conforming loan.
Why should the government be backing up bankers and other creditors on home mortgage loans? Think of the way student loans are guaranteed by the government. Providing this service is seen as something that is in the public good. Far fewer students would be able to go to college if banks could not make student loans without risk.
The same goes for home mortgages. Without conforming loans, the home selling industry would collapse because few bankers or other lenders would be willing to stick their necks out for big home loans. By guaranteeing the mortgages with the conforming loan system, the economy is stimulated, more hard-working people can buy homes and the American Dream keeps rolling along.