What type of loans meet FNMA/FHLMC standards and can be traded on the secondary market?

Conforming loans are those that meet the specific guidelines set by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). These loans adhere to strict limits on the loan amount, borrower creditworthiness, mortgage insurance ratios, and documentation requirements. Because they comply with these standards, conforming loans can be easily sold and traded in the secondary mortgage market, making them attractive to lenders and investors.

The ability to trade these loans on the secondary market is a critical function that helps to provide liquidity in the mortgage lending process. This liquidity allows lenders to free up capital to continue offering mortgages to new borrowers. The guidelines established by FNMA and FHLMC promote consistency and transparency, thereby assuring investors of the quality of the loans they are purchasing.

Other types of loans, such as non-conforming loans, do not meet these specific criteria and often carry higher risks or are aimed at borrowers with different needs, which makes them less liquid and not typically tradable in the same markets. Subprime loans are intended for borrowers with lower credit scores and carry a higher risk of default, while adjustable-rate mortgages (ARMs) vary in their interest rates and can also come in conforming and non-conforming forms, but not all