What is a conforming loan?

A conforming loan is one that meets the guidelines set by government-backed agencies such as Fannie Mae and Freddie Mac. There are a number of criteria that must be met for a conforming loan. For 2019, the conforming loan ceiling in most areas is $484,850 and any loan amount that exceeds the limit is considered a jumbo loan. In counties with higher home prices, the maximum conforming loan limit is $726,525.

How Do Lenders Use Conforming Loans?

It is important to note that Fannie Mae and Freddie Mac do not issue mortgages. Instead, they insure mortgages issued by lenders, creating more room for banks to issue more loans than they would have otherwise been able to do without the insurance. For this reason lenders prefer to work with conforming loans, as they can be easily packaged into investment bundles and sold in the secondary mortgage market, freeing up capacity to lend more to home buyers.

Conforming Loans vs. Nonconforming Loans

Both Fannie Mae and Freddie Mac only buy conforming loans to repackage into the secondary market, making the demand for a nonconforming loan much less. Mortgages that exceed the conforming-loan limit are classified as nonconforming or jumbo mortgages. The terms and conditions of nonconforming mortgages can vary widely from lender to lender, but the mortgage rates and minimum down payment for jumbo loans are typically higher because they carry greater risk for a lender.