Conforming Loans and the Real Estate Market
In the United States, mortgage loans are governed by a set of rules of compliance. This ensures that loans are fair to both the lender and the borrower. The required guidelines are set forth by the group of financial services corporations created by the United States Congress. These corporations are known as Government-Sponsored Enterprises, or GSEs.
Those loans that are found to be in compliance with GSE guidelines are known as conforming loans. Loans that do not meet these specific guidelines are simply called non-conforming loans. In addition, there is also something called a jumbo loan, which is a loan that does not meet GSE guidelines solely because the amount of the loan is above the limits set by the guidelines.
Very little existed by way of guidelines when it came to residential mortgage loans prior to 1970. The United States government authorized Fannie Mae to purchase these types of loans as a lender in 1970. Universal documents pertaining to mortgages were developed in collaboration with Freddie Mac at that time. National standards for what is today known as the conforming loan were also created. This type of loan has much more liquidity than its non-conforming counterpart, since Fannie Mae and Freddie Mac are constantly looking to purchase conforming loans.
Fannie Mae and Freddie Mac can buy only those loans that meet the criteria set by the Office of Federal Housing Enterprise Oversight. Such criteria include debt-to-income home buyer ratio limits and documents required before the loans can go through. Based on the October-to-October changes in median home price, the maximum loan amount is also considered a specific factor in that regard. Since Fannie Mae and Freddie Mac can only purchase loans within the criteria set by the Office of Federal Housing Enterprise Oversight, repackage and sell them to the secondary market, this makes demand for non-conforming loans quite drastically less, as well.
Also to note is that a temporary increase in the conforming loan limits for high-cost regions in the United States was incorporated into the 2008 economic stimulus package. While the bills were signed into law by President Bush on February 13, 2008, lenders were still choosing not to honor them as late as March 30, 2009. While it may not be something that directly affects potential home buyers, it is important to be aware of the underlying issues while considering to buy a house just the same.
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