Legal Definitions - conforming loan

A conforming loan is a type of mortgage loan that meets specific criteria established by government-sponsored entities, primarily the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These criteria include a maximum loan amount, known as the conforming loan limit, which is set annually by the Federal Housing Finance Agency (FHFA).

When a mortgage loan is "conforming," it means it is eligible to be purchased or guaranteed by Fannie Mae and Freddie Mac. These agencies play a crucial role in the housing market by buying mortgages from lenders, which provides lenders with more capital to issue new loans. This process helps to stabilize the mortgage market, reduce risk for lenders, and ultimately make home loans more accessible and affordable for borrowers by driving down interest rates. The FHFA sets these limits to ensure that Fannie Mae and Freddie Mac focus their resources on supporting the broader housing market for typical homes, rather than very high-end properties.

• Example 1 (Standard Conforming Loan):

  A young couple, Sarah and Tom, are buying their first home in a suburban area for $450,000. They secure a mortgage for $360,000. In their region, the FHFA's conforming loan limit for a single-family home is $766,550.

  How it illustrates the term: Sarah and Tom's mortgage of $360,000 is well below the $766,550 limit and likely meets all other Fannie Mae and Freddie Mac guidelines. Because it is a conforming loan, their lender can easily sell it to one of these agencies, which often allows Sarah and Tom to receive a more competitive interest rate and favorable terms on their loan.

• Example 2 (High-Cost Area Conforming Loan):

  Maria is purchasing a condominium in a designated high-cost metropolitan area where the FHFA has set a higher conforming loan limit of $1,149,825. Her condo costs $1,050,000, and she needs a mortgage of $840,000.

  How it illustrates the term: Despite the high purchase price and loan amount, Maria's mortgage still falls within the *adjusted* conforming loan limit for her specific high-cost market. This means her loan is considered conforming, allowing her to benefit from the standardized processes and potentially lower interest rates associated with loans eligible for purchase by Fannie Mae or Freddie Mac, even in an expensive housing market.

• Example 3 (Non-Conforming Loan):

  David is buying a luxury estate for $2,500,000 in a region where the standard conforming loan limit is $766,550, and even the high-cost area limit is capped at $1,149,825. He requires a mortgage of $1,800,000.

  How it illustrates the term: David's mortgage amount of $1,800,000 significantly exceeds both the standard and high-cost conforming loan limits set by the FHFA. Therefore, his loan is considered "non-conforming," often referred to as a "jumbo loan." Lenders cannot sell these loans to Fannie Mae or Freddie Mac, which typically means David will face higher interest rates, stricter qualification requirements, and a more complex approval process because the lender retains more risk.