In the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, a conforming loan is a mortgage loan

Mortgage loan

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

 that conforms to GSE

Government-sponsored enterprise

A government-sponsored enterprise is a financial services corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent...

 guidelines.

In general, any loan which does not meet guidelines is a non-conforming loan

Non-conforming loan

A non-conforming loan is a loan that fails to meet bank criteria for funding.Reasons include the loan amount is higher than the conforming loan limit , lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it. In many cases, non-conforming loans can be...

. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a jumbo loan.

History

Starting in 1970, Fannie Mae was authorized by the United States Government to purchase residential mortgage loan

Mortgage loan

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

s. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would come to be known as a conforming loan.

Importance

Fannie Mae and Freddie Mac are continuously in the market for conforming loans; because of this, conforming loans benefit from greater liquidity than non-conforming loans.

Criteria

The Office of Federal Housing Enterprise Oversight (OFHEO) set the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy. Criteria include debt-to-income ratio limits and documentation requirements. The maximum loan amount is set based on the October-to-October changes in median home price, above which a mortgage is considered a jumbo loan, and typically has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market

Secondary market

The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....

, making the demand for a non-conforming loan

Non-conforming loan

A non-conforming loan is a loan that fails to meet bank criteria for funding.Reasons include the loan amount is higher than the conforming loan limit , lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it. In many cases, non-conforming loans can be...

 much less. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.)

Conforming Loan Limits

Per Fannie Mae:

Year	|Historical Conventional Loan Limits		Limits for Alaska Alaska Alaska is the largest state in the United States by area. It is situated in the northwest extremity of the North American continent, with Canada to the east, the Arctic Ocean to the north, and the Pacific Ocean to the west and south, with Russia further west across the Bering Strait... , Hawaii Hawaii Hawaii is the newest of the 50 U.S. states , and is the only U.S. state made up entirely of islands. It is the northernmost island group in Polynesia, occupying most of an archipelago in the central Pacific Ocean, southwest of the continental United States, southeast of Japan, and northeast of... , Virgin Islands United States Virgin Islands The Virgin Islands of the United States are a group of islands in the Caribbean that are an insular area of the United States. The islands are geographically part of the Virgin Islands archipelago and are located in the Leeward Islands of the Lesser Antilles.The U.S...  and Guam Guam Guam is an organized, unincorporated territory of the United States located in the western Pacific Ocean. It is one of five U.S. territories with an established civilian government. Guam is listed as one of 16 Non-Self-Governing Territories by the Special Committee on Decolonization of the United...  are 50% higher. Virgin Islands was designated a high cost area in 1992 and Guam in 2001. Prior to 1984, second mortgage limits were the same as first mortgage limits. Subsequent legislation reduced the limits to 50% of first mortgage limits. Fannie Mae had no second mortgage program before 1981.

2008 Economic Stimulus Bill

A temporary increase in the Conforming Loan Limits for high-cost areas of living has been incorporated into the 2008 economic stimulus package. Congress has authorized an increase of the single family residences limits to the lesser of $729,750 or 125% of the median home value within the metropolitan statistical area (MSA). High-cost loans are only available through FHA loans.

The bill was signed into law by President Bush

George W. Bush

George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....

 on February 13, 2008, but the new rates are still not being honored by any lenders (as of March 30, 2009).

The new Jumbo-Conforming program has been adopted by Fannie Mae and Freddie Mac effective April 1, 2008 until December 31, 2010.