Conforming loans

Conforming loans are those that are eligible for purchase by Fannie Mae and Freddie Mac on the secondary market. Fannie Mae and Freddie Mac are private organizations that operate on the secondary mortgage market. Their basic function is to purchase mortgages from lenders so that lenders can meet the consumer demand for loans. Because Fannie Mae and Freddie Mac sell the mortgages as securities, they demand that the mortgages be of a certain quality. For that reason, they have developed various eligibility requirements that outline the types of mortgages they will buy.

So what are these regulations? First of all, conforming loans must fall below a certain price limit set by Fannie Mae and Freddie Mac. This limit, which is based on the national average for the cost of a home, changes slightly from year to year. Loans that exceed a certain amount are considered too risky. If you require a loan that exceeds the conforming loan limit, you will need to obtain a jumbo loan, which usually carries a higher interest rate.

Additionally, Fannie Mae and Freddie Mac also dictate the underwriting requirements for people obtaining conforming loans. That means they basically deem who is fit for a mortgage, and who isn’t. Because of these requirements, most mortgage lenders require that you meet certain standards pertaining to income and credit history.

These regulations all serve a greater goal, which is to make housing affordable for many different kinds of people. The secondary mortgage market helps keep interest rates low, and stabilizes rates in less prosperous areas of the country. It also ensures that funding will be available to anyone who qualifies.