What is a conforming loan?

A conforming loan is defined as a loan that meets the specific guidelines established by Fannie Mae and Freddie Mac. These guidelines encompass a variety of criteria, including loan limits, credit scores, debt-to-income ratios, and documentation requirements. The reason this designation is important is that it allows these loans to be eligible for purchase or securitization by Fannie Mae and Freddie Mac, which ultimately helps to provide liquidity in the mortgage market and potentially lower borrowing costs for consumers.

Loans that do not meet these specific criteria may be classified as non-conforming loans, which can include jumbo loans that exceed the maximum loan limits or loans with more lenient underwriting standards. Such characteristics distinguish conforming loans as being aligned with the standards that promote stability and consistency in lending practices across the market.

In contrast, the other options describe categories or types of loans that do not strictly align with the definition of a conforming loan. Government-insured loans, for example, are backed by entities such as the FHA or VA, while loans with adjustable rates pertain to the interest rate structure rather than compliance with specific purchasing standards. Additionally, some loans are targeted to first-time homebuyers but may or may not conform to the guidelines set by Fannie Mae and Freddie Mac