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What’s the difference between conforming and non-conforming loans?
Most loan rates that you hear quoted are for conforming loans. A conforming loan
is one with an original balance of $333,700 or less for a single-family home.
Any loan amount larger than that is called non-conforming.
Two major agencies—the Federal National Mortgage Association (FNMA) or Fannie
Mae and the Federal Home Loan Mortgage Corporation (FHLMC) or Freddie Mac—can
purchase conforming loans. For lenders who sell their loans after they are closed,
there is an extremely liquid market. But the availability of potential buyers
is reduced greatly when the loan amount goes above the conforming limit. To attract
enough buyers for these loans, a lender often increases the rate on non-conforming
loans. The conforming loan limit is adjusted annually at year-end by FNMA and
FHLMC. Some lenders also have their own guidelines for dollar differentiation
between conforming and non-conforming loans.
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