What is a conforming loan?
A conforming loan (sometimes called a conventional loan) conforms to guidelines for the least risky types of loans. The most obvious element of a conforming loan is the loan amount, which is based on the average price of a home nationwide. (In 2007, the conforming loan amount in all states except Alaska and Hawaii was $417,000 for a single-family home.)
In addition, conforming loans have fairly conservative qualifying guidelines related to credit score, debt-to-income ratio, down payments, and documentation.
Conforming loans meet the criteria set out by Fannie Mae and Freddie Mac, two agencies set up by the federal government whose mission is to provide stability and affordability in the mortgage market. They do this by buying conforming loans from lenders, who use the cash to lend more to borrowers. This encourages lenders to make prudent loans to borrowers.
A conforming loan refers to a loan that meets the criteria set out by Fannie Mae and Freddie Mac for loans they are willing to buy from lenders.
Why it matters to you ?
Conforming loans typically have the lowest interest rates over time because they are generally viewed as the least risky and because they are basically guaranteed by Fannie and Freddie – lenders can raise cash by selling the loans to those agencies. Loans over the conforming loan limit (over $417,000 in 2007) are called jumbo loans and typically carry a higher interest rate. If your loan is above the conforming loan limit, consider splitting your loan in two so that your main mortgage falls below the conforming loan limit.
The conforming loan limit is considerably higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands.