While reduced, the array of loans today can still be confusing for borrowers. The most popular option remains the fixed rate, “conforming” loan. The term conforming indicates that the loan meets the underwriting guidelines for either Fannie Mae or Freddie Mac, the two largest purchasers of loans in the secondary market.
What is the secondary market?
Here is how the loan market generally functions when you apply for a mortgage loan. As mortgage brokers, Humboldt Home Loans finds a “source lender” who will actually provide the money and “fund” your loan. Your loan is often sold within a few days after closing of escrow to either Fannie Mae or Freddie Mac. These investors are called the secondary marketeers. They obtain the loan and literally reimburse the source lender the loan funds with which they can now make another loan to other borrowers. The secondary market arrangement is a way of keeping the money in circulation in order to maximize the number of loans provided. This transfer usually occurs without the borrower knowing about it.
You have probably heard that loans get sold?
This sale applies to the transfer of the servicing of the loan – the lender that collects the monthly mortgage payments send the monthly statements and manages the impound account. There is no change in loan terms when there is a “servicer” change. It simply means that another lender has purchased the servicing rights from your original lender. In this case you will be notified that you will need subsequently to send your mortgage payments to the new servicer. This will not affect the terms of your loan but merely determine to whom you will make your mortgage payments. It is a fairly common practice with conforming loans.
Now, back to what conforming means
The loan must meet certain guidelines and be fully documented as to income, down payment funds available and the other normal details of a loan qualification. Because it is fully documented and fully meets the underwriting guidelines identified by the investors, the conforming loan usually offers the most competitive interest rate and terms of all the loan options.
While these conforming loan amounts change, usually annually, the adjustments occur on a county by county basis based upon median home prices. For now, the maximum loan limits for conforming loans in Humboldt County are:
- Single Family Home: $766,550
- Two Family (Du-plex): $981,500
- Three Family (Tri-plex): $1,186,350
- Four Family (Four-plex): $1,474,400
In 2009 Congress passed legislation to increase the above loan limits on a county by county basis. This high balance conforming loan varies in amount for different counties but Humboldt County remains as noted above. There are unconfirmed reports that high balance loan limits will eventually available in all counties. In the meantime, if the loan amount exceeds the above limits, the loan is categorized as a non-conforming or “jumbo” loan. While also fully documented, these loans are sold to different secondary market investors and the interest rate is usually a bit higher.
The non-conforming loan should not be confused with past less documented loan options known in part as “stated income” or “no income-no asset” type loans. Sometimes referred to as “niche” or “sub-prime”, these loans were very popular but had all but disappeared as loan options. It should be mentioned that in 2018 there was the re-emergence of loan options for borrowers with low credit scores or other complications prohibiting the acquisition of conforming financing. These loan programs are typically now called “non-QM” and include various loan options. Borrowers are urged to discuss such loan products with their loan officer as these can be confusing. Some suggest that these are the same “type” of loan options that led to the finance difficulties culminating in the start of the 2008 recession. These newest loan programs do seem safer than the old sub-prime products but remain a subject to be discussed more fully with anyone seeking such financing.
All borrowers are best advised to discuss their specific loan needs with a loan officer.