Conforming Vs. Non-Conforming Mortgage

••• brand new home 2 image by Paul Moore from

A conforming loan generally is less costly because of a lower interest rate and it's easier to qualify for than a non-conforming loan. That's a big benefit for the buyer who wants to save money on the mortgage payment and might have difficulty being able to qualify.

Conforming Loans Match Guidelines

A conforming loan "conforms to" the guidelines established by the two government-controlled mortgage financing corporations, Fannie Mae and Freddie Mac, which buy a lot of the loans made by lenders. Lenders like to originate conforming loans because they're easily sold to Fannie Mae, Freddie Mac or other investors. Being able to sell the loans means the lender can take those loans off its books and use the money to make more loans, which is how the lender makes a profit.

Loan Limit is Maximum Amount

Conforming loans are subject to what's called a "loan limit." The limit is a dollar amount that is the largest loan that Fannie Mae or Freddie Mac will buy. The loan limit varies around the nation, but it's generally higher in places where housing is more expensive. The Federal Housing Finance Agency, which is the regulator for Fannie Mae and Freddie Mac, has a function on its website that allows home buyers to look up the loan limit by U.S. county.

Loan Limit Usually $417,000

The top conforming loan as of May 2010 is $729,750 in parts of California and Hawaii. In locales that have average or lower-cost housing, the maximum loan limit is $417,000. Loans that are larger than the limit for the country are called non-conforming loans or sometimes super-conforming, super-jumbo or just jumbo loans, depending on the loan amount.

Jumbo Loan Has Higher Interest Rate

The big advantage for borrowers who want to buy a home or refinance a mortgage is that the interest rate will almost always be significantly lower on a conforming loan, all else being equal. Jumbo loans, in particular, tend to have a much higher interest rate. Even a small difference in the rate can mean big savings on the interest expense over the term of the loan.

Pressure to Lower the Limit

The maximum conforming loan limit is set by Congress and the FHFA and can vary from one year to the next. Some effort is under way to lower the maximum amount to reduce the risk to the government of big loan balances. So far, the limit has stayed put. For most people, however, a lower limit would still be adequate to get the benefits of a conforming loan.

Non-Conforming Loans

A non-conforming loan is one that doesn't meet the guidelines that allow the lender to sell the loan to Fannie Mae or Freddie Mac, or another investor that follows those guidelines. These loans typically are non-conforming because the loan amount is higher than the limit for the county where the property is located. A jumbo loan, for instance, is by definition a non-conforming loan. Conforming loans, which meet the Fannie Mae or Freddie Mac guidelines, are much more common than non-conforming loans.