A conforming loan is a mortgage loan that meets the bank funding requirements. The importance of the mortgage banking and loan industry to the economy has overtime led Freddie Mac and Fannie Mae each year to set limits on what constitutes a conforming loan. This limit is based on the October-to-October changes in mean home price, above which a mortgage is considered a non-conforming loan. A non-conforming loan usually has higher mortgage rates linked to it, such as a jumbo loan.
The logic behind the higher rates for non-conforming loans is because Freddie Mac and Fannie Mae can only purchase mortgage loans that are conforming, to be bundled for sale in the secondary market, thus leading to a decrease in market demand for non-conforming loans. Herein, the laws of supply and demand make it for difficult for mortgage lenders to sell the non-conforming loans; thus passing the cost on to you, the consumer by charging a mortgage loan rate.
The conforming home loan limit has increased considerably in recent years as home prices have gone through the roof in the United States, and presently many
home mortgage loans exceed the conforming limit, especially in metropolitan areas.
However, homeowners can navigate clear of exceeding the conforming limit by simply dividing their first mortgage loan into a first and second mortgage. For example, let’s say your first mortgage loan is $416,999, by taking out a second mortgage for $200,000 or more you can avoid the conforming limit.
For home properties in some states and U.S. territories such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limits are 50 percent higher. You can calculate your home mortgage with a home mortgage calculator
2007 Single-Family Mortgage Loan Limits – Fannie Mae
Single-Family Mortgage Loan limits effective January 1, 2007:
First mortgages
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One-family loans: $417,000
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Two-family loans: $533,850
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Three-family loans: $645,300
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Four-family loans: $801,950
Note: One- to four- family mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the country.
Second mortgages
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$208,500
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In Alaska, Hawaii, Guam, and the U.S. Virgin Islands: $312,750
Source: Fannie Mae (www.fanniemae.com)