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Health & Fitness

What is a Conforming Loan?

One of the most common questions I get from home-buyers is, “What is a conforming loan?” The answer is deceptively simple.

A conforming loan is a loan that conforms to Fannie Mae and Freddie Mac guidelines.

The answer, hopefully, leads to a number of additional questions and so I wanted to explain briefly what a conforming loan is and what makes a loan conforming.

A Brief History
In 1970, the Federal National Mortgage Association (FNMA, nicknamed Fannie Mae), was authorized by the United States government to purchase residential mortgage loans. Fannie Mae worked with the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) to develop consistent criteria, guidelines and documents, to package home loans that would be known as a conforming loan.

If you want further information about what exactly Fannie Mae and Freddie Mac do with these conforming loans once they buy them and why they buy them please contact me via my website, www.americasells.com. I will be thrilled to talk your head off about Fannie, Freddie, MBS, and how every real estate transaction done since 1970 depends on the conforming loan.

Onward and forward.

The Definition, per Wikipedia
In the United States, a conforming loan is a mortgage loan that conforms to GSE (Fannie Mae and Freddie Mac) guideline. The most well-known guidelines is the size of the loan, which as of 2013 was limited to $417,000 for single family homes in the continental US.  Other guidelines include borrower's loan-to-value ratio (i.e. the size of down payment), debt-to-income ratio, credit score and history, documentation requirements and so on.

In general, any loan which does not meet guidelines is a non-conforming loan. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a jumbo loan.


Now I really want to spin out of control and write a book about guidelines and debt to income ratios and uniform applications but I will not, yet. Again I will be thrilled to explain any of these things in depth to anyone that has questions but so I do not have “TMW”—too many words—I will just throw out the numbers.

As of today and through the Spring of 2014 conforming loan amounts are $417,000.00 except in high cost areas, like the Bay Area, where the conforming loan limit is up to $625,000.00.  This is important to remember because a conforming loan has a lower interest rate than a non-conforming loan, which translates into more bang for the buck.

Also the conforming loan limits are fluid. The limits can go up or down depending on what the FHFA decides to do with them. Whenever the conforming loan limits change it is a big deal and luckily the limits are staying the same for a little while longer than they used to.

FHFA Announces Delay in Conforming Loan Limit Reductions until Spring 2014
Edward DeMarco, acting Director of the Federal Housing Finance Agency, announced recently that officials will delay the announcement of reductions in conforming loan limits for mortgages sold to Fannie Mae and Freddie Mac until the spring. It will then take an additional 6 months after the announcement has been made for changes to take effect. That means status quo regarding the limits AND the rates for at least another 9 months to a year.

The FHFA, which regulates Fannie and Freddie, had previously stated its intention to reduce conforming loan limits by January 1, but received significant pushback from mortgage bankers, real estate agents and homebuilders regarding the possible impact the change might have on the housing market. Additionally, industry members noted that sweeping regulatory changes scheduled to take effect January 1 were already a burden on the operational structure of the housing finance industry and that mortgage lenders might not be able to respond to additional changes by then.

He did announce however that mortgage loan limit reductions would come from both the national base level, which currently sits at $417,000, and the temporary high-cost market limits, which currently go as high as $625,000.  When the announcement is made, he noted, lenders will have six months to prepare before the new limits would be enacted and enforced.
   
If you have any questions or want to share your thoughts please contact me through my website www.americasells.com.





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