What does "conforming loan" mean?

A conforming loan is defined as a loan that adheres to the underwriting guidelines established by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that purchase mortgages in order to create liquidity in the housing market. These guidelines include specific criteria related to loan amount, credit score, debt-to-income ratio, and other factors that determine the eligibility of borrowers.

The importance of conforming loans lies in their increased access to lower interest rates and broader funding, as they can be bought and sold easily in the secondary market. This helps stabilize the mortgage market and makes home financing more accessible for qualified borrowers.

In contrast, a loan backed by the Federal Housing Administration is considered an FHA loan, which has different criteria and insurance requirements. Subprime loans typically have higher interest rates and are aimed at borrowers with low credit scores, which does not fit the conforming loan definition. Loans that exceed the maximum limits set by the GSEs are termed non-conforming or jumbo loans, as they do not meet the necessary guidelines for conventional conforming status. Hence, the correct answer accurately reflects the specific requirements and implications associated with conforming loans.