Conventional loans may be sub-grouped as ‘conforming,’ ‘high-balance conforming,’ and ‘non-conforming’.
Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These secondary market lenders purchase mortgage loans complying with the guidelines from mortgage lending institutions, package the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for homeowners.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount (Conforming Loan Amount), borrower credit and income requirements, debt-to-income ratio limits, down payment limits, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year. One to four unit properties are eligible with conforming and high balance conforming financing.
“High Balance Conforming” mortgages are mortgages originated using higher maximum loan limits and are permitted in designated high-cost areas as defined by Fannie Mae and Freddie Mac. These higher loan limits are intended to provide lenders with much-needed liquidity in the highest cost areas of the country, while also lowering mortgage financing costs for potential buyers located in these areas.
Financing above the maximum loan limit established by Fannie Mae and Freddie Mac are known as non-conforming (jumbo) loans. Non-conforming loans tend to have higher interest rates, require more down payment and can have higher closing costs. Approval guidelines are a bit more stringent as well. If you are purchasing a home in a county where the loan limit does not cover the cost of the home, you may consider securing a jumbo loan.