Conforming loans, otherwise known as conventional loans, are mortgages that meet bank-funding criteria set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Both of these stock-holding companies buy mortgage loans from lending institutions and secure them for resale to the investment community. All year round, Fannie Mae and Freddie Mac are working for you, establishing limits on what constitutes a conforming loan in a mean home price.
Buying back mortgage loans allows these agencies to provide a continuous flow of affordable funding to banks that reinvest money back into additional mortgage loans. Fannie Mae and Freddie Mac exclusively buy loans that are conforming, to repackage into the secondary market and effectively decreasing the demand for non-conforming loans.
Because the loans need to be attractive on the wholesale market, conventional loans have higher minimum credit scores and other criteria that can make it more difficult to qualify for than government run programs.
While many think that a 20% down payment is required for all conventional loans, many lenders now offer low down payment options.
Low Down Payment: Conventional loans typically offer down payment options as low as 3%, easing the initial financial burden on homebuyers and enabling more people to enter the housing market.
Flexible Credit Requirements: Conventional loans tend to have more flexible credit score requirements compared to other loan types, making it possible for individuals with varying credit histories to qualify for homeownership.
Diverse Qualification Criteria: Conventional loans consider a range of factors including employment history, income stability, and debt-to-income ratio, providing borrowers with different financial backgrounds more opportunities to qualify.
Market Competitiveness: Conventional loans are not government-backed, resulting in potentially more competitive interest rates and terms from lenders, especially for borrowers with strong credit profiles.
