"Conforming" vs "Non-Conforming"

In order to understand what conforming and non conforming means you must first have an understanding of the secondary mortgage market. The secondary markets provides liquidity to lenders to make loans by purchasing mortgages from originators thereby replenishing thier credit lines and giving the lenders the continued ability to originate new loans.


So what does it mean when you hear "conforming" and "non-conforming?" A "conforming" loan simply means it’s a loan that meets Fannie Mae and/or Freddie Mac guidelines. For instance, a "conforming" loan maximum limit currently is $417,000, anything larger than this limit is considered "non-conforming" or "jumbo." Another example would be borrowers who acquire loans exceeding 80% LTV (loan to value) are required to carry private mortgage insurance. The guidelines set forth by Fannie Mae and Freddie Mac in the Conforming market defines the risk that these secondary market investors are willing to take for their products. When you walk into a Washington Mutual, Wells Fargo, Bank of America or Chase and you see them advertise 30 or 15 year mortgage rate, those rates are Fannie and Freddie Conforming loan rates for a 30 year or 15 year fixed with an 80% LTV ratio and full documentation of income and assets. In short, a "conforming" loan is one that meets the requirement to be purchased by Fannie Mae or Freddie Mac on the secondary market.



FYI...LTV mean Loan to Value ratio or the ratio of the loan size versus the value of the home/collateral.