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What Does a Conforming Loan Mean?

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A conforming loan is a mortgage loan that meets the purchase guidelines set by Fannie Mae and Freddie Mac. To truly comprehend what it means for a loan to be conforming, it’s necessary to understand how mortgage loans work. In this post, we’ll cover mortgage lenders and investors, lending guidelines, and what non-conforming loans are, too.

Mortgage Loan Originators

A mortgage loan originator is the lending entity that the purchaser borrows money from to purchase the home. Many loan originators, typically called mortgage lenders, range in size from large, national companies to local businesses.

The Federal Housing Finance Agency (FHFA) set mortgage lending guidelines to protect borrowers and lenders. Loans that fit these guidelines are called conforming loans. When a loan conforms, a government-sponsored entity (Fannie Mae or Freddie Mac) can purchase the loan originator’s mortgage. This system saddles the long mortgage timeline on the government-sponsored entities and frees up cash for the loan originator to make more loans. While mortgage lenders could set their own criteria for assessing borrowers, it’s typically in their best interest to stick to the guidelines.

Mortgage Industry Investors (Fannie Mae and Freddie Mac)

Fannie Mae and Freddie Mac are two government-sponsored entities that purchase mortgages from loan originators. They do this to free up cash for lenders and allow them to lend more. This is necessary because home mortgages typically have long repayment periods. This way, the mortgage investors slowly receive repayment while the loan originators can continue issuing loans so that more Americans can become homeowners.

Conforming Loan Guidelines

As mentioned above, a conforming loan fits the guidelines set by the FHFA. The guidelines are the limits placed on the loan amount by the FHFA each year. The conforming loan limit for 2021 is $548,250. That means a conventional loan for less than that amount is considered to be conforming. This maximum is higher in some more expensive counties.

Non-Conforming Loans

Not every loan under the FHFA’s limit will conform, though. A non-conventional loan, such as a VA loan or USDA loan, is non-conforming. These loans have other benefits the borrower enjoys, like a $0 down payment, instead.

Additionally, loans for amounts over the limit are also considered non-conforming. A conventional loan for an expensive property over the FHFA limit is called a “jumbo” loan. Lenders will usually offer higher interest rates on jumbo loans due to the increased risk burden and lack of remortgage guarantee.

Why Have a Conforming Loan?

As mentioned before, conforming loans are available for purchase by Fannie Mae and Freddie Mac, making them less risky to the lender. Because the risk is lower, lenders offer lower interest rates. Additionally, conforming loans are more standardized than non-conforming loans. This aspect makes it easier for borrowers to shop around at different lenders to find one that best suits their needs.

Need a Conforming Loan?

Do you need a conforming loan for your next home purchase? If so, Park Place Finance offers competitive interest rates and fast closing times so that you can begin enjoying your new home. Contact us today to get started with the loan approval process.

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