What does the term "conforming loan" refer to?

The term "conforming loan" refers to a loan that meets the specific guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. These guidelines dictate the maximum loan limits, borrower creditworthiness, and other eligibility criteria. Loans that conform to these standards are eligible for purchase by these entities, which helps ensure liquidity in the mortgage market.

Conforming loans typically feature competitive interest rates and lower down payment requirements, making them more accessible to borrowers. This adherence to established criteria also reduces the risk for lenders, as the loans are considered more secure investments compared to non-conforming loans, which may fall outside of these guidelines. This distinction is essential for understanding the broader landscape of mortgage financing and the role of governmental influence in promoting homeownership.