Conforming Loans

Conforming Home Loans Must Meet Certain Requirements. Conforming home loans are a type of conventional loan that falls within the guidelines as set by Fannie Mae and Freddie Mac.

Who are Fannie Mae and Freddie Mac?

Each is a privately held corporation that works to increase homeownership opportunities for all kinds of families, including those with limited incomes. These corporations make homeownership accessible to more people, in part, by making financing affordable. Both Fannie Mae and Freddie Mac purchase mortgages from primary markets. Mortgages are only eligible for purchase if they meet guidelines, such as conforming loan limits, as set by the corporations. Other requirements set by the corporations include those related to borrower income and credit history.

Conforming mortgage lenders sell conforming loans to Freddie Mac and Fannie Mae. These corporations then convert the loans to securities that are sold to investors. These sales and investments ensure that financial resources continue to be available for prospective homeowners. Conforming loan limits are reviewed annually. The limit may or may not change following the review. If the conforming loan limit does change it is likely because there has been a change in mean home prices within the twelve months under consideration. Here are some more things to consider with conforming loan limits:

• Conforming loan limits have increased significantly in the last decade. Limits in the mid- 1990’s were set at around $207,000. Today, conforming loan limits have reached $417,000. Loans that exceed this amount are referred to as non-conforming. They are also called jumbo loans. Conforming loan limits are higher in a handful of places, such as Guam and Alaska.
• Conforming home loans are available for single family homes and up to four family units. Conforming loan amounts increase with the number of units. Most recent limit for a four family unit - $801,950. Properties with more than 4 units are treated as commercial and subject to different guidelines.
• The vast majority of home loans are conforming home loans.

Conforming Home Loans Are Available for a Variety of Term Lengths. Conforming loans are available at fixed rates. Mortgages shoppers can choose conforming loan rates with a 15 year fixed rate or terms that extend as long as a 40 year fixed rate.

The costs with conforming loan amounts vary according to conforming loan rates, loan APR (annual percentage rate, which is the annual cost of the loan to the homeowner), and points added to the loan. Conforming home loans are also available at adjustable rates and as balloon mortgages.

• Adjustable rates “adjust” periodically. For example a 5-year ARM (adjustable rate mortgage) adjusts, or has a rate change, 5 years after the loan is originated.
• Balloon mortgages allow home owners to make smaller loan payments during a pre-determined period of the loan. At the end of that period the homeowner must make a balloon or lump sum payment that covers that outstanding balance on the principal.

Final Tip for Conforming Home Loans: Mortgage shoppers seeking conforming loans with a LTV (loan to value) ratio of at least 95 percent generally qualify for the most attractive interest rates.