Conforming loans meet two criteria:
1. They cannot exceed the current years maximum loan amount limits. The 2005 conforming loan limit is $359,650
2. They also must conform to the credit history, income, loan-to-value, and debt guidelines established by Fannie Mae and/or Freddie Mac.
When a loan falls out of the conforming loan limit ($417,000 for 2006 for single family residential homes) it is often referred to as a "jumbo" or "luxury" home loan, and if larger than $1 million it is referred to as a "super-jumbo" loan amount. It usually takes "niche" lenders to finance these types of loans who specialize in jumbo and luxury home financing. Additionally, if the borrower seeks financing for more than 80% Loan-to-Value (LTV) on these types of jumbo and super-jumbo loans, they will have to seek out even more specialized lending institutions. In these types of cases working with a mortgage broker that specializes in these types of loans is best since no local institutions are going to provide financing to their applicants. These types of loans are considered higher risk, investing a larger sum of money in one investment, weakening their diversification portfolio.
Loans that do not meet the guidelines set for by Fannie Mae and/or Freddie Mac are referred to as either nonconforming or Subprime loans.
Conforming mortgage also limit the property types used as collaterals to single family, duplex, 3-family, 4-family, condominiums, cooperatives, and planned unit developments. Properties that do not fall under one of these categories, such as mixed-use properties, commercial properties, apartment buildings of 5 units or more, require non-conforming loans.
Conforming loans now have guidelines to allow you to do a no doc loan, stated income or a stated asset loan.
One feature of a conforming loan that is very beneficial to borrowers is that there are normally no pre payment penalties. Borrowers sometimes find rates and fees that are comparable to conforming loans on Alt A or Subprime programs only to discover that the loan has penalty for early prepayment.
Because the conforming loan amount has not kept pace with inflation in many hot real estate markets across the country, average home purchases in these areas are increasingly financed with jumbo loans.
The new 2006 conforming loan limit is being raised to $417,000. The Office of Federal Housing Enterprise Oversight (OFHEO) determines this amount based on federal data on mean (average) home prices. The conforming loan limits adjustments are supported by the October-to-October changes in the mean (average) home price, as published by the Federal Housing Finance Board (FHFB).
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