Conforming loans meet two criteria:
1. They cannot exceed the current years maximum loan amount limits. The 2005 conforming loan limit is $359,650
2. They also must conform to the credit history, income, loan-to-value, and debt guidelines established by Fannie Mae and/or Freddie Mac.
Loans that do not meet the guidelines set for by Fannie Mae and/or Freddie Mac are referred to as either nonconforming or subprime loans.
One feature of a conforming loan that is very beneficial to borrowers is that there are normally no pre payment penalties. Borrowers sometimes find rates and fees that are comparable to conforming loans on Alt A or subprime programs only to discover that the loan has penalty for early prepayment.
Because the conforming loan amount has not kept pace with inflation in many hot real estate markets across the country, average home purchases in these areas are increasingly financed with jumbo loans.
The new 2006 conforming loan limit is being raised to $417,000. The Office of Federal Housing Enterprise Oversight (OFHEO) determines this amount based on federal data on mean (average) home prices. The conforming loan limits adjustments are supported by the October-to-October changes in the mean (average) home price, as published by the Federal Housing Finance Board (FHFB).
