Due to popular demand, the federal government has been for decades promoting the American dream of owning your own house. One tool in its arsenal is the Federal National Mortgage Association (FNMA), more commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), typically referred to as Freddie Mac. These two government-sponsored enterprises either purchase outright or provide a guarantee on roughly half of all the mortgage loans in the US. Since the risk of default on such mortgages is transferred to the government, it enables the lenders to offer very attractive rates on those mortgages.
The question is, which mortgages would Fannie Mae and Freddie Mac guarantee or buy? The government would like them to help make mortgages more affordable, but they cannot afford to guarantee very risky loans, since every default is a direct cost to the taxpayers. Therefore, the Office of Federal Housing Enterprise Oversight sets the rules about what mortgages qualify for Fannie Mae and Freddie Mac's guarantees. The loans that meet these guidelines are called conforming loans. Any others are nonconforming loans.
Conforming loans have limits on the loan size, loan-to-income ratio, documentation requirements, etc. Overall, conforming loans are safer than non-conforming loans. The rates on conforming loans which can be sold to Fannie Mae or Freddie Mac are lower than on non-conforming loans.
What does it mean to you? If you can qualify for a conforming loan (perhaps by providing additional documentation, or reducing the loan amount a little), try to do so - you may cut 0.5% or so from your interest rate. Your lender will help you, since they are equally happy to issue a conforming or a non-conforming loan for you.
