Loans come in two types – conforming and non-conforming. In order to fully understand the difference, you first must know a little bit about Fannie Mae and Freddie Mac.
Freddie Mac, also known as Federal Home Loan Mortgage Corporation, is a corporation chartered by the federal government. It purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Freddie Mac also has products designed for those who might have a bit of problem getting a conventional mortgage, such as police officers or teachers.
Fannie Mae, or Federal National Mortgage Association, is a corporation also created by the federal government that buys and sells conventional mortgages as well as VA loans and FHA loans. VA stands for Veterans Administration and provides affordable loans for veterans and members of the military. FHA stands for the Federal Housing Administration. Those with not the best credit scores or who only have a small down payment usually obtain FHA-insured mortgages. Fannie Mae is very active. It provides funds for one in seven mortgages. It works to make mortgages more available and more affordable.
Fannie Mae and Freddie Mac are very influential in the mortgage industry due to their great size and their relationship with the federal government. They set the standard for conforming loans. A conforming loan meets the terms and conditions that are determined by Fannie Mae and Freddie Mac. These terms and conditions include the maximum loan amount, the requirements for the borrower to qualify for the loan and what are considered suitable properties for mortgages. By looking at the average change in home price each year, Fannie Mae and Freddie Mac set the loan limit. Loans that fall within these parameters are conforming loans.
Non-conforming loans are above the loan limit set by Fannie Mae and Freddie Mac. The disadvantage of a non-conforming loan is that is has a higher interest rate than a conforming loan since it is above that limit. These non-conforming loans are also known as jumbo loans.
For more information on conforming loans, please read our Smart Borrower article Conforming Loans.