What is the definition of a conforming loan?


Quick Answer

A conforming loan is a loan that meets the terms and conditions of Freddie Mac and Frannie Mae such as maximum loan amount, qualification requirements and eligible properties. The concept behind a conforming loan is that the lender is able to sell the loan to Freddie Mac or Frannie Mae to free up more money to give out more loans, according to LendingTree.

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Full Answer

The loan limit is the most important factor in conforming loans, because it sets the standard for loan sizes that are purchasable by Freddie Mac or Frannie Mae. In most places the loan limit is $417,000, as of 2015, but some places are labeled as high-cost housing markets. The loan limit for these areas is up to $729,750, LendingTree reports. Loan limits for specific areas are found through the Federal Housing Finance Agency. Loans that are larger than the loan limit set by Frannie Mae and Freddie Mac are referred to as "jumbo" or "super-jumbo" loans, and these loans are known to have higher interest rates than conforming loans.

The main benefit of a conforming loan is that interest rates are lower, which makes mortgage payments smaller, explains LendingTree. Lower mortgage payments allow the borrower to save a substantial amount of money over the lifespan of a conforming loan.

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