What Are Conforming Loans And What Do They Mean To Borrowers?
Conforming loans are the most common type on the market today and the most beneficial for both lenders and buyers. If you’re in the market to buy a home, it pays to learn how you can qualify for a conforming loan and save the most on your mortgage financing.
What Is A Conforming Loan?
Conforming loans are mortgages that meet Fannie Mae and Freddie Mac guidelines. Conforming lenders underwrite and fund the loans and then sell them to investors like Fannie Mae and Freddie Mac. Once securitized, the loans are sold to investors on the open markets. Because of their liquidity and the government regulations, conforming loans often have lower interest rates than non-conforming loans.
How Do Conforming Loans Work?
When buyers look at their mortgage options, they’ll come across many different types of mortgages, including FHA, VA, USDA, and conventional/conforming loans. It’s often difficult for buyers to see the difference between the loans when applying or even going through underwriting. Still, government-backed loans (FHA, USDA, VA) and conforming loans have much less onerous underwriting requirements than some types of nonconforming loans, such as jumbo loans.
Conforming loans have slightly stricter guidelines, but you’ll pay mortgage insurance (if applicable) for a shorter period and save more money over the life of the loan.
What Are Conforming Loan Limits?
Fannie Mae and Freddie Mac have conforming loan limits. This means you can’t borrow more than the limit for that year unless you’re buying in a high-cost area with higher limits. Any borrower that needs more than the conforming loan limits will need a nonconforming loan, such as a jumbo loan.
The baseline conforming loan limit for 2021 is $548,250 – up from $510,400 in 2020. The limit is higher in areas where the median house cost exceeds this number, so borrowers in high-cost areas can get conforming loans of up to $822,375, depending on the limit in their individual county.