Conforming Mortgage Loan
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There are many benefits to a conforming mortgage loan over a subprime home financing package or a jumbo lending contract. These types of loans are aptly named, as they conform to the standards of the organization that regulates lending practices in the United States. This organization is called the GSE, Government Sponsored Enterprise. The Government Sponsored Enterprise sets rules for banks to stimulate and protect lending in three areas: education, agriculture and housing. The GSE is made up of financial professionals who know the industry and can help provide quick and easy loans for those who truly need them. By setting a standard of rules to identify a lending package that qualifies as a safe financing venture, a bank could feel comfortable lending to individuals in situations that followed the rules and regulations. In this way, the economy is stimulated and borrowers are finding it easier to get the much needed funding for their homes. "Give to him that asketh thee, and from him that would borrow of thee turn not thou away." (Matthew 5:42)
The Government Sponsored Enterprise started out helping farmers get farm loans. They voted on a standard by which to judge healthy and unhealthy farm loans. Then the lender could loan the farmer money with little reservation. The farmer appreciated it, as they did not have to jump through a million financial hoops to get a loan. The GSE also helps stimulate the education loan industry. By following objective regulations, a lender can remain impartial and have a gauge as to the health of a particular lending package. Though Government Sponsored Enterprise has done great things for both of these fields of lending, the house financing arena has truly benefitted most from its oversight and regulations. Defining a conforming mortgage loan can help a banking professional distinguish wise and unwise investments from the ocean of loan applications sitting on his desk.
This kind of regulation helps the borrower too. The main reason a loan does not qualify to be a conforming mortgage loan is that the amount the borrower wants to finance is above the allowable amount. When defining a conforming mortgage loan, the GSE only allows the borrower to finance a certain amount over the average cost of a house in the United States. If the borrower is a multi-millionaire, that is fine. The jumbo finance market, the market sector handling loans too great to conform, is still a thriving industry. However, the discovery that the loan exceeds the standard allowable amount may cause the borrower a moment to pause and reflect on the wisdom of such a sizable loan. It also gives the banking professional a viable reason for not financing the home purchase, regardless of the income and credit history of the borrower.
The GSE does not insure the loans, so a lending package that conforms to the criteria is not completely secured financing, but much research and expertise has gone into the regulations governing the lending practices, so at least the lender knows that it is wiser to finance a conforming mortgage loan than jumbo loans. These regulations do not just benefit the lender, however. By regulating the debt to income ratio, the Government Sponsored Enterprise has also protected potential borrowers from predatory lenders. What are predatory lenders? They are banking professionals who garner commissions from the loans they make. The reason commission based lending is a bad idea is that the lending officer is tempted to lend money to people who do not have the ability to pay it back. The borrower's credit will be ruined, but the financial professional still gets the commission check. By regulating the acceptable debt to income ratio, the Government Sponsored Enterprise makes sure that, at least in theory, the borrower is able to make the monthly payments of the lending package they are approved for.
Each year another team of financial professionals called the Office of Federal Housing Enterprise Oversight or, OFHEO, determines the greatest amount that will qualify to be a conforming mortgage loan. This is decided each year, because the housing market, the economy and the average income all change and fluctuate. This means that once a year, financial professionals have a concrete number by which to determine if a lending package is a conforming mortgage loan or not. Banks approve jumbo loans all the time, but the financial institution cannot benefit from the oversight and aide of the GSE on a jumbo lending package.
Most banks make more money selling their loans to investors on Wall Street, than from homeowners' monthly house payments. According to the GSE's research and experience, it is easier to get an investor to buy a lending package that conforms with the regulations than a jumbo lending package. So, banks really take the Government Sponsored Enterprise's advice very seriously. So do investors. Borrowers notice the ease of qualifying for a conforming mortgage loan, because the Government Sponsored Enterprise board is already backing it, and the bank is already comfortable lending money toward a lending agreement that has governmental oversight and the ability to be sold for cash on the dollar. If a borrower has an income that is at least three times the amount of the house, and the house costs less than the defined jumbo amount, the lender will work with the borrower to move the application process through quickly. If these two criteria are not met, then the lending package is not a advisable by the GSE, and the bank may be hesitant or even refuse to proceed with the lending arrangement.
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