Fact Checked

What is a Conforming Loan?

O. Wallace
O. Wallace

A conforming loan is a loan that conforms to limits set by Fannie Mae and Freddie Mac. Any loan that exceeds these limits is considered a jumbo loan, which results in higher interest rates. Fannie Mae and Freddie Mac are both private, stockholder-owned companies which operate under congressional charters to ensure that mortgage money is available to consumers. They increase the money available to borrowers by purchasing mortgages from lenders, bundle the mortgages together, and then sell the securities to investors.

The conforming loan limits set by Fannie Mae and Freddie Mac are determined by the Office of Federal Housing Enterprise Oversight (OFHEO) and based on the average home price. The single family conforming loan limit for 2006 is 417,000 US dollars (USD). These limits are adjusted annually and based on the October to October fluctuations in the average home price, which is published by the Federal Housing Finance Board (FHFB). The fluctuations are calculated from a monthly survey of lenders, which considers both new and existing homes. Conforming loan limits for homes in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50% higher due to higher home prices.

The 2006 conforming loan limit for a two-family home is 533,850 USD; for a three-family home, 645,300 USD; and for a for-family home, 801,950 USD. For borrowers seeking a second mortgage, the 2006 limit is 208,500 USD.

Conforming loans are used for purchasing homes.
Conforming loans are used for purchasing homes.

Although Fannie Mae and Freddie Mac do not loan directly to borrowers, they make sure that there is a continuous low-cost flow of credit to finance America’s housing. Their focus is to make homeownership a possibility for low, moderate, and middle income Americans. Fannie Mae estimates that due to the increase in 2006’s conforming loan limits, an additional 466,326 Americans will qualify for a conforming loan.

For those lamenting the conforming loan limits, the numbers don’t lie. The benefit of Fannie Mae and Freddie Mac’s involvement in the secondary mortgage market has been calculated at a nearly 23.5 billion USD savings for borrowers nationwide. According to the Office of Management and Budget (OMB), borrowers see mortgage rates 25-50 basis points lower because of what Fannie Mae and Freddie Mac do. This is reflected in up to a half percentage savings on each individual homebuyer’s mortgage rate.

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    • Conforming loans are used for purchasing homes.
      By: Monkey Business
      Conforming loans are used for purchasing homes.