What is a Conforming Loan?

A loan that conforms to limits set by Fannie Mae and Freddie Mac is known as a conforming loan. The loan that exceeds these limits is known as a jumbo loan and carries a higher rate of interest. Both Fannie Mae and Freddie Mac are companies that are private and stockholders owned and operate under congressional charters ensuring the availability of loans to consumers.

The method of operation that they adopt is to increase the amount of money available to the borrowers by purchasing the mortgages from the lenders and bundling them together and then selling these securities to the investors. The office of Federal Housing Enterprise determines the conforming loan limits that are set by Fannie Mae and Freddie Mac. This limit is based on the average home price.

These limits undergo an annual adjustment which is based upon the fluctuation from October to October in the average prices of the homes. These average prices are published by the Federal housing Board. The calculations of the fluctuations are done according to a monthly survey of lenders which take into consideration both the new and existing homes.

Home prices in Alaska, Hawaii, Guam, and the US Virgin Islands are 50% higher and thus the confirming loan limits are higher. The conforming loan limits for 2006 for various homes are as follows- For a two family home the limit is 533,850 USD. For a four family home the limit is 801,950 USD and for those who wish to seek a second mortgage the limit is 208,500 USD.

Fannie Mae and Freddie Mac are not into giving loans directly to the borrowers however they ensure the steady flow of low cost credit in the market to ensure the progress and growth of America’s housing sector. The focus of these organizations is to make home owning a possibility for the low, moderate and middle income group people. The increased loan limits have made it possible for 466,326 Americans to qualify for a conforming home loan.

The involvement of Fannie Mae and Freddie Mac in the secondary mortgage market has been calculated and it comes to nearly about 23.5 billion USD savings for nationwide borrowers. The actions of Fannie Mae and Freddie Mac the borrowers see 25-50 base points lower in the rate of conforming loans. Homebuyers benefit as it gives then half a percentage of savings.