Conforming vs. Jumbo Loans

A conforming loan is a loan that conforms to the guidelines established by the Federal National Mortgage Association (FNMA, also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, also known as Freddie Mac). Lenders that make loans conforming to these guidelines can sell those loans to Fannie Mae or Freddie Mac.

Each year, the conforming loan limits may be adjusted by these agencies. The conforming loan limit adjustments are based on the October-to-October changes in the mean home price, as published by the Federal Housing Finance Board (FHFB).

For 2006-2008, the conforming loan limits were:

One-family: $417,000
Two-family: $533,850
Three-family: $645,300
Four-family: $801,950

The 2007 loan limit for second mortgages was $208,500. The maximum loan amounts for one-to-four family mortgages and second mortgages in Alaska, Hawaii, Guam and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the U.S.

A jumbo loan, or non-conforming loan, is simply a loan that exceeds the conforming loan limits. Because Fannie Mae and Freddie Mac do not buy these loans, the secondary market for jumbo loans is less competitive, and as a consequence, the interest rates for these loans will be slightly higher. This means that if you are applying for a mortgage that is just above the jumbo limit, you can get a better rate if you can reduce your loan amount so it falls just below the conforming threshold.