A conforming mortgage is one that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are willing to purchase, because it conforms to the dollar limitations set by both of these companies. Because the government supports these two government-sponsored enterprises, they have reduced borrowing costs than private companies and can provide lower rates of interest on mortgages that conform to their requirements.
History
The federal government created Fannie Mae and Freddie Mac to stabilize the mortgage market by purchasing mortgages from private creditors, then selling them as mortgage-backed securities. The two GSEs cover 80 percent of conventional mortgages–mortgages not backed by the Federal Housing Administration or the Veteran's Administration, according to the Mortgage Professor.
Limitations
The two GSEs are restricted in the size of the mortgage they can purchase. According to Fannie Mae, from 2006 to 2010, the limits were $417,000 to a one-unit home; $533,850 for two components, such as a duplex or a home with a garage flat; $645,300 for three components; and $801,950 for four. In regions with high housing costs, GSEs set higher dollar limitations: In 2010, Fannie Mae's high-cost area conforming mortgages conducted to $729,750 for one unit; $934,200 for two; over $1 million for three components and over $1.4 million for four. Alaska, Guam, Hawaii and the Virgin Islands all have greater limits.
Benefits
In case you have GSE backing for a loan, you can typically cut .125 to .25 percent off the rate of interest, according to Lending Tree. Increasing the maximum size of repaying loans assists homeowners with big commissions: In 2005, a $400,000 mortgage could have been a loan–too big to conform–but a homeowner who took out a loan that size today would qualify for GSE aid.
Potential
In case you’ve got an older, nonconforming mortgage that now falls under the highest amount allowed by the GSEs, you may have the ability to refinance your mortgage as a conforming loan. If you’ve got $400,000 left on your mortgage, then refinancing as a conforming loan may shave off your interest rate to save $64 per month, or Lending Tree states.
Factors
If you're taking out a jumbo mortgage, then start looking for ways to make it into a conforming loan, Investopedia recommends. For instance, consider making a larger down payment to reduce the size of the loan you need. Even if the mortgage you want qualifies as a conforming loan, there's no promise you'll get itYou'll still need to verify that your income is sufficient to make monthly payments, have a great credit history, and fulfill any other creditor requirements.