Mortgage plans are divided into different types. One of the general categories is termed as conventional loans. It can then be classified into the subcategories of conforming and non-conforming loans. Conforming loans are a residential mortgage loan that corresponds to the set of guidelines implemented by The Office of Federal Housing Enterprise Oversight (OFHEO). It is a mortgage that is equal to or less than the dollar amount dictated by the conforming loan limit decided upon by Fannie Mae (FNMA) and Freddie Mac (FHLMC).
How do conforming loans work?
Conforming loans are made by many different lenders, including banks of all sizes, credit unions and online lenders. The big thing conforming loans all have in common is that they must meet requirements for:
- Credit scores
- Down payment
- Debt-to-income ratio (the amount of debt you can have relative to your income)
- Loan limit
While Fannie Mae and Freddie Mac set guidelines that lenders must obey for conforming loans, lenders have leeway to set their own stricter standards. This means some lenders will be choosier about whom they lend to than others, and some lenders will charge higher or lower interest rates than others.
Conforming loans are not insured or guaranteed by government agencies and, as such, are a type of conventional loan. Alternatives to conforming loans include FHA loans, VA loans and USDA loans, all of which are backed by the U.S. government to promote homeownership and have less-stringent qualifying requirements but often charge higher upfront fees or have higher mortgage insurance costs.
Borrowers need to shop around carefully among different lenders to find the right loan for them.