Conforming loans, otherwise known as conventional loans, are mortgages that meet bank-funding criteria set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Both of these stock-holding companies buy mortgage loans from lending institutions and secure them for resale to the investment community. All year round, Fannie Mae and Freddie Mac are working for you, establishing limits on what constitutes a conforming loan in a mean home price.
Buying back mortgage loans allows these agencies to provide a continuous flow of affordable funding to banks that reinvest money back into additional mortgage loans. Fannie Mae and Freddie Mac exclusively buy loans that are conforming, to repackage into the secondary market and effectively decreasing the demand for non-conforming loans.
Because the loans need to be attractive on the wholesale market, conventional loans have higher minimum credit scores and other criteria that can make it more difficult to qualify for than government run programs. One benefit, however, is that you typically see a lower interest rate.
While many think that a 20% down payment is required for all conventional loans, many lenders now offer low down payment options of only 5 percent.
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