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What Is a Conforming Loan?

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TERMINOLOGY

The term "conforming loan" is one that is commonly used in the lending industry today. Here are the basics of what a conforming loan is and what it means to borrowers.

Conforming Loan

The term conforming loan became popular after 1970 whenever Freddie Mac and Fannie Mae worked together to create standardized loan documents and processes. If a loan fits the criteria that are set forth by Freddie Mac and Fannie Mae, it is known as a conforming loan.

Loan Amount

In order to be qualified as a conforming loan, the mortgage loan will have to be under a certain amount of money. Currently, it has to be less than $417,000 in order to qualify as a conforming loan. If the loan is above $417,000, it would be classified as a jumbo loan.

Risk

When it comes to lending, lenders prefer to work with conforming loans. By comparison, jumbo loans are much more risky for the lender. This means that they are going to have to charge a higher amount of interest for non-conforming loans than they do with conforming ones.

Implications

If you are a borrower, you want to get a mortgage that is considered to be a conforming loan. This will lower the amount of interest that you have to pay when compared to a non-conforming loan.