What is the difference between a jumbo and a conforming loan?


Quick Answer

A conforming loan is one for which the rate varies based on guidelines set forth by the Freddie Mac and Fannie Mae organizations, according to NerdWallet. A jumbo loan, also called a non-conforming loan, is a loan that is above the conforming limit. Different lenders have different conditions for the jumbo loans they offer, and these circumstances change the rates and interest fees a borrower can receive.

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Full Answer

Freddie Mac and Fannie Mae are government-sponsored organizations that offer a secondary market for mortgages, explains NerdWallet. This lets lenders put certain loans into different investment packages for possible reselling. Called conforming loans, their legally bound value can’t exceed the conforming loan limit. This is the primary difference between them and jumbo loans, which can exceed this amount.

The benefit of conforming loans is that there are often lower fees and reduced interest rates, according to NerdWallet. This lets lenders free up the capital after selling the loan and use that capital to create more loans. For people who don’t qualify for conforming loans, FHA mortgage loans are available. Provided by the Federal Housing Administration, these loans help people who have less-than-perfect credit and who have a smaller amount of a down payment for a new home.

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