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.