When banks and lenders provide financing, they are usually restricted to loan amounts and interest rates that are deemed eligible for certain government regulations. This type of loan is known as a conforming loan. A conforming loan generally has an interest rate and loan amount that are both within the government-stipulated limits.
Conforming loans are determined by two sets of guidelines – the Federal Housing Finance Agency (FHFA) and the Federal National Mortgage Association (FNMA). The FHFA keeps an updated list of conforming loan limits known as the conforming loan limit list, and the FNMA sets the maximum loan amount and interest rate a lender can charge on a conforming loan.
In 2023, for most of the United States, the conforming loan limit is $726,200. This means that the loan amount cannot exceed that figure and lenders may not charge an interest rate above a certain level on the loan. In general, conforming loans are sold on the secondary market and the market sets the interest rate that is most competitive to lenders.
Conforming loans are more common, and generally more desirable, than non-conforming loans. With a non-conforming loan, the lender can take on more risk, potentially offering higher loan amounts and/or lower interest rates than the conforming loan limits. However, a non-conforming loan also has a much greater risk of default and is less attractive to investors.
Conforming loans are a good option for those who want a loan that falls within the government-set limits. They are also desirable for lenders since the loans are typically backed by an insurance policy from the government, reducing risk and making them easier to sell on the secondary market.