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Simple English definitions for legal terms
conforming loan
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A quick definition of conforming loan:
A conforming loan is a type of mortgage that follows certain rules set by the government. These rules are meant to make sure that the loan is safe for both the borrower and the lender. The loan amount cannot be too high, and the property being bought must be a single-family home. This helps people who want to buy a home but may not have a lot of money. The government helps by making sure that the loan is insured, which means that if the borrower cannot pay back the loan, the lender will not lose all their money. This makes it easier for people to get a loan and buy a home.
A more thorough explanation:
A conforming loan is a type of mortgage that meets certain criteria set by the Federal Housing Finance Agency (FHFA). These criteria include the loan amount, borrower's credit score, and debt-to-income ratio. Conforming loans are also subject to other restrictions set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that insure loans for single-family homes and promote the resale of packaged housing loans on secondary markets.
The FHFA sets a conforming loan limit every year, which is the maximum amount that a loan can be to qualify as a conforming loan. The limit varies depending on the location of the property, with higher limits for more expensive areas. As of 2021, the conforming loan limit is $548,250 for most of the United States, but it can go up to $822,375 in high-cost areas like San Francisco or Alaska.
Conforming loans are popular among borrowers because they typically have lower interest rates than non-conforming loans, which do not meet the FHFA's criteria. This is because Fannie Mae and Freddie Mac buy conforming loans from lenders, which reduces the lenders' risk and allows them to offer lower rates to borrowers.
John wants to buy a house for $500,000 and applies for a mortgage. His lender tells him that he qualifies for a conforming loan because the loan amount is below the conforming loan limit of $548,250. John is happy because he knows that he will likely get a lower interest rate than if he had applied for a non-conforming loan.
In this example, John's loan meets the criteria set by the FHFA and is below the conforming loan limit, so it qualifies as a conforming loan. Because of this, John is likely to get a lower interest rate than if he had applied for a non-conforming loan.