What is a Conforming Loan?
Mortgages can be generally categorized as conventional or non-conventional. Conventional mortgages are further categorized as conforming and non-conforming loans. Conforming loans are residential mortgage loans that correspond to the set of guidelines implemented by The Office of Federal Housing Enterprise Oversight (OFHEO). It is a mortgage that is equal to or less than the dollar amount dictated by the conforming loan limit decided upon by Fannie Mae (FNMA) and Freddie Mac (FHLMC).
This dollar value limit is annually revised in accordance to the Monthly Interest Rate Survey of the Federal Housing Finance Board (FHFB). Once the principal of the conforming loan exceeds the set limit, the loan will defeat its entitled right for resale. It will later on be categorized under a non-conforming loan or jumbo loan. It is the responsibility of the lending officer to classify your loan as conforming or non-conforming loan.
In addition, conforming loan is made to ensure that Fannie Mae (FNMA) and Freddie Mac (FHLMC) will firmly follow the appropriate conforming loan limits in order to promote affordable loans to the greater public. These two corporations are allowed to purchase mortgage loans conforming to the guidelines set by different mortgage lending institutions. FNMA and FHLMC are buying these mortgages from their original lenders in order to prevent any danger leading to a smoother flow of credit. Later on, they package these mortgages into securities so that prospective investors will have an interest in buying these mortgages. With this strategy, Fannie Mae and Freddie Mac will offer an incessant flow of funds for home financing.
In a nutshell, FNMA and FHLMC intend to help lower to middle income households to purchase their own homes for an affordable payment set-up/ plan. It provides a lower charge of interest rates compared to other types of loans. Thus, it is considered to be a favorable kind of loan. However, the requirements for conforming loans are usually rigid and thorough. These requirements include debt-to-income ratio, maximum loan amount, borrower credit and income requirements, down payment, and suitable properties.
Having these said requirements, the prospective borrowers need to exert effort on the processing phase of the loan in order to avail a more affordable mortgage insurance. Even though it presents stringent requirements, still, the benefits it offers are worth it.