Conforming Loan - Explained
What is a Conforming Loan?
Written by J. Mance Gordon
Updated at April 18th, 2022
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Table of Contents
What is a Conforming?How Does a Conforming Loan Work?Conforming Loans vs. Nonconforming LoansSpecial Considerations for Conforming LoansWhat is a Conforming?
In the United States, there are certain guidelines that loans are required to meet as stipulated by government agencies. If a loan meets the stated requirements, it is a conforming loan. A Conforming Loan must meet the dollar amount, otherwise known as the financing limit set by the Federal Housing Finance Agency (FHFA) and funding rules (underwriting guidelines) set by Fannie Mae and Freddie Mac. Any loan that doesn't meet the requirements is a non-conforming loan.
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How Does a Conforming Loan Work?
While FHFA is a government-owned agency, Fannie Mae and Freddie Mac are government-sponsored agencies. The rules and guidelines set by these agencies must be conformed to by lenders in the US. The dollar amount (financing limit) of a loan is the most popular loan guideline that lenders and borrowers look out for. The Federal Housing Finance Agency (FHFA) sets loan limit in the U.S, in 2018, the loan limit set by FHFA was $453,100 while it increased to $484,350 in 2019. Aside from the loan limit, other requirements that a conforming loan must meet are documentation requirements, credit score, loan-to-value ratio, debt-to-income ratio, among others. How Do Lenders Use Conforming Loans? While Conforming loans offer low-interest rates to borrowers, it expands the capacity of a lender to make more loans to borrowers or home buyers. Conforming loans are easier to sell in the market and create from for additional financing for lenders. Lenders often ensure that their loans conform to the rules and guidelines stipulated by the regulatory agencies.
Conforming Loans vs. Nonconforming Loans
Non-conforming loans are the opposite of conforming loans. These loans do not meet rules and requirements set by FHFA, Fannie Mae and Freddie Mac. Non - conforming lenders give their terms and conditions to borrowers, different from the basic guidelines. There is often a low demand for non-conforming loans in the market, which is why most lenders deal in conforming loans.
Special Considerations for Conforming Loans
The FHFA in the United States sets conforming loan limits every year, this limit is set in a dollar amount. Mortgage lenders are also required to file reports showing how well they have complied to the conditions set by FHFA, alongside the guidelines of Fannie Mae and Freddie Mac.