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Conforming vs. Not

A CONFORMING LOAN is one that meets the standards used by Freddie Mac and Fannie Mae, making them eligible for purchase by either institution. Result: A conforming loan often charges a somewhat lower interest rate, perhaps 0.25 percentage point less than a comparable nonconforming loan.

To qualify as a conforming loan, a mortgage has to meet a number of conditions, the most notable of which is size. Each year, the Federal Housing Finance Agency announces the conforming loan limit for the year ahead. In more expensive parts of the country, home loans can be larger than the standard loan limit and still qualify as conforming.

What if a loan is larger than these limits? It’s considered a jumbo loan. Such loans are more difficult for lenders to securitize, by packaging them into mortgage bonds and then selling these bonds to investors. Instead, lenders will often keep a jumbo mortgage on their own books, hence the higher cost and stricter scrutiny of borrowers.

Next: Closing Costs

Previous: Fixed vs. Adjustable

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