Definition of Conforming Loans

Learn about conforming mortgages.

The definition of a conforming loan is a mortgage that meets all of the requirements set by mortgage giants Fannie Mae and Freddie Mac. Conforming loans can be sold on the secondary mortgage market, so it is the preferred type of loan for mortgage lenders to make. Conforming mortgages are government-backed mortgages such as those offered by Fannie Mae and Freddie Mac, which is what makes these mortgages less risky for lenders to make and easier to sell on the secondary market.

Qualification Requirements

The qualification criteria for conforming loans are stricter than guidelines for non-conforming loans. Conforming loans set a maximum rate of 28 percent for housing expenses, meaning that the borrower's total housing payment cannot be more than 28 percent of the borrower's monthly income. Conforming loan qualification requirements also state that the borrower's total expenses cannot exceed 36 percent of the gross annual income.

Maximum Loan Amount

The amount of a conforming loan is capped. Generally, a mortgage amount cannot exceed $415,000 to be considered a conforming loan. The maximum amount does vary according to geographic locations, so some areas of the country have higher loan amounts, while other areas have lower maximum loan amounts. Loans that do not fall under the conforming requirements and limitations are generally referred to as non-conforming loans. These types of loans are also referred to as jumbo loans because it is usually reserved for loan amounts that exceed the maximum cap set on conforming mortgages.

Credit

Another area that conforming loans are stricter on is the borrower's credit history and credit score. Conforming loans typically require good credit scores (650 or higher) in order to qualify for the loan. Poor or bad credit borrowers may have a hard time qualifying for a conforming loan and may have to seek a non-conforming loan instead.

Down Payments

Conforming loans also have programs that allow borrowers to put as little as 3 percent of the purchase price of a home as a down payment on the home. This allows the borrower to finance the remaining 97 percent of the purchase price. Conforming loans also allow borrowers to put larger down payments with the option to pay mortgage insurance or put at least 20 percent down to avoid paying mortgage insurance.

Costs

Conforming mortgages tend to have lower interest rates than non-conforming mortgages. The closing costs on conforming mortgage also tend to be less expensive than non-conforming mortgage because the conforming loans are less risky for lenders to make than non-conforming mortgages.

References

• Explaining Mortgages: Non Conforming Loan