The 5 Market Segments

Currently the home loan market has 5 market segments that differ in their underwriting requirements, pricing or both. Conforming loans are those that may be sold to Fannie Mae or Freddie Mac, and therefore must adhere to the requirements of those agencies. The conforming jumbo segment, which is a temporary response to the financial crisis, has the same underwriting rules as the standard segment, but prices are a little higher.

FHA loans are those that will be insured by FHA, and therefore must adhere to the underwriting requirements of FHA. These are less restrictive than the requirements applicable to conforming and non-conforming loans. FHA jumbos, like conforming jumbos, are a temporary response to the crisis. FHA’s underwriting rules are the same for both, but lenders typically set more restrictive rules on FHA jumbos.

Non-conforming loans do not meet conforming or FHA underwriting requirements, usually because they are too large, though they may differ in other respects as well. The underwriting requirements on non-conforming loans are set by the private lenders who will hold the loans in their portfolios. Prices of non-conforming loans are higher than those of conforming or FHA loans. Before the crisis, many of these loans were securitized, which kept rates down, but secondary markets have not yet revived.




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