Q: What does the term "conforming" mean? Is it the same as an adjustable-rate mortgage?
A: Simply put, a "conforming" mortgage "conforms" to a set of standards so that the loan can be eligible to be sold to the two government-sponsored enterprises called Fannie Mae or Freddie Mac.
These standards allow these mortgages to be more easily bundled into mortgage-backed securities (MBS) and sold to investors. Since the characteristics of each loan in the MBS are similar to one another, investors can set certain expectations as to how the investment will perform. Among other things, this helps reduce risk and makes it possible to offer borrowers lower rates.
These "conforming" standards include:
- Amount of the mortgage
- Type of property
- Borrower's credit score
- Verified borrower documentation
- If there is less than a 20 percent down payment, a private mortgage insurance policy must be attached to the loan
- Loan term (and a number of other items)
Loans that don't meet these requirements in one form or another are called "non-conforming", which includes large loans ("jumbo mortgages") and loans with different features or risks. At the moment, only a very small component of the market is made up of these non-conforming loans.
Adjustable-rate mortgages can be conforming or non-conforming.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.