What does the term "conforming" refer to in conventional loans?

The term "conforming" in the context of conventional loans refers specifically to loans that meet the guidelines established by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that buy and securitize mortgages. These guidelines include limits on the loan amounts, credit quality of the borrowers, debt-to-income ratios, property types, and other underwriting standards.

Conforming loans are important in the mortgage market as they typically offer lower interest rates and better terms compared to non-conforming loans, which do not meet these criteria. Because they adhere to set standards, conforming loans are more easily sold in the secondary mortgage market, contributing to their popularity among lenders and borrowers. This establishes a sense of security around the mortgage, as lenders can reliably recoup their investments through these entities.

Thus, by recognizing that conforming loans are those that comply with the specific guidelines of Fannie Mae and Freddie Mac, one understands the significant role these entities play in the stability and structure of the mortgage industry.