World’s most confusing mortgage terms

If you think mortgage jargon is confusing, you’re not alone.  And it’s not only novice homebuyers who are stumped.  Some of the terms are so tricky even the experts don’t agree about exactly what they mean.  Here’s a list of some of the world’s most confusing mortgage terms:

Conforming loan: A conforming loan is a mortgage that adheres, or “conforms,” to a set of loan guidelines or standards, explains Bob Walters, chief economist of Quicken Loans, a mortgage company in Detroit.  By far, the most common type of conforming loan is one that meets Fannie Mae or Freddie Mac guidelines.  These two entities purchase mortgages from lenders and package them into securities for resale to investors.

Non-conforming loan: Loans that don’t conform are known as “non-conforming.” Keith Gumbinger, vice president at HSH.com in Riverdale, New Jersey, explains, “You can spend your entire life in the set of rules of Fannie and Freddie, which define everything from which credit buckets they will write loans to, down payment requirements for mortgage insurance, dollar amounts of the loans, etcetera and so forth.  Any loan that fails one of those things makes it non-conforming.”

Government loan: This category is comprised of FHA, VA and USDA loans.  FHA loans are insured by the Federal Housing Administration.  VA loans are guaranteed by the U.S. Department of Veterans Affairs.  USDA loans are backed by the U.S. Department of Agriculture.  USDA loans are also called RD or Rural Development loans, after the USDA division that handles them.

Jumbo loan: Jumbo loans have a loan amount that’s higher than Fannie Mae or Freddie Mac guidelines known as loan limits.  The cutoff in most U.S. counties is $417,000.  Loans for less aren’t jumbos.  Loans for more are jumbos.  Sometimes, jumbo-conforming loans.  These loans conform to Fannie Mae or Freddie Mac guidelines, but exceed the basic $417,000 loan limit.  Instead, jumbo-conforming loans may be up to $625,500, a special higher limit that Fannie and Freddie allow in high-cost home areas like San Francisco and New York. “People use this terminology kind of loosely,” Walters says.  “Generally what they mean (by jumbo-conforming) is that the loan amount is above Fannie and Freddie guidelines, but in many other respects the loan conforms to underwriting guidelines that Fannie and Freddie put forward.”  Jumbo-conforming loans are also called conforming-jumbo, super-conforming, expanded conforming, agency jumbo and high-cost loan limit.  “Any loan that conforms to Fannie and Freddie guidelines and has a dollar amount above $417,001 and below $625,500is a jumbo-conforming or conforming-jumbo,” Gumbinger says.  

Conventional loan: This category includes all conforming loans and many non-conforming loans, but no jumbo, government or subprime loans. “Conventional usually means good credit, not jumbo, not FHA or VA, and a giant subsection that is Fannie and Freddie-eligible, which is typically called conforming,” Walters explains. Is ‘conforming’ and ‘conventional’ the same thing? “Conforming” and “conventional” are often used interchangeably or synonymously, says Kirk Chivas, chief operating officer of First Commerce Financial, a mortgage company in Wixom, Michigan. That makes sense because conforming loans make up the lion’s share and more of the conventional loan category.   Jumbo loans generally are considered to be conventional, but non-conforming.  Would a jumbo-conforming be considered conventional?  No one wants to go there. Another puzzler is that Fannie Mae and Freddie Mac used to be publicly traded corporations known as government-sponsored entities (GSEs).  Today, both Fannie Mae and Freddie Mac are essentially controlled by the federal government.  So, why aren’t conforming loans considered to be government loans?  Probably it’s only a matter of tradition or — shall we say? — convention. “Back in the days when Fannie and Freddie were GSEs, they were quasi-government.  Not calling them government loans has survived, even though now they are in conservatorship,” Walters says.

Private mortgage insurance: or just, mortgage insurance. Another distinction involves mortgage insurance, which may be required when a borrower’s down payment or equity is less than 20 percent of the home’s purchase price or value.  Some mortgage insurance is called private mortgage insurance (PMI) and some is simply called mortgage insurance (MI) or mortgage insurance premium (MIP).  Why two different terms? “PMI is private mortgage insurance, and it’s for conventional or conforming loans,” Chivas explains.  “MIP is mortgage insurance premium, and that is on FHA and USDA government loans.  The VA doesn’t have MIP. It has a funding fee. It doesn’t have mortgage insurance, so it’s not applicable.” The bottom line for borrowers is that it’s more important to understand the loan than the label.

 

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