It is probably a relief to know mortgage loans have to follow rules of compliance in the United States. Both the lender and the borrower can be assured the loans are fair as a result. Created by the United States Congress, the required guidelines are set forth by a group of financial services corporations. Most people refer to these corporations as Government-Sponsored Enterprises, or GSEs.

Conforming loans are thus loans found to be in compliance with GSE guidelines. It follows that loans not meeting these set guidelines are known as non-conforming loans. There are also loans known as jumbo loans, simply because their amount is too high to meet GSE guideline limits.

Prior to 1970, very little existed by way of guidelines when it came to residential mortgage loans. Beginning in 1970, the United States government authorized lender Fannie Mae to purchase these types of loans. Working with Freddie Mac, Fannie Mae began to develop universal documents pertaining to mortgages. It also created national standards for what is today known as the conforming loan. Since Fannie Mae and Freddie Mac are constantly looking to purchase conforming loans, this type of loan has much more liquidity than its non-conforming counterpart.

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.

For high-cost regions of the United States, the 2008 economic stimulus package also incorporated an increase in the conforming loan limits on a temporary basis. Even though these bills became law in February 13, 2008 when President Bush signed them, as late as March 30, 2009 lenders will still refusing to acknowledge them. Even if you don’t think it will affect you as a potential home buyer, it is never a bad idea to understand these types of underlying issues in the housing market.

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