What is a conforming loan?

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In a Nutshell

A conforming loan is a mortgage that lenders can sell to Fannie Mae or Freddie Mac. Conforming loans must follow a set of rules and can't be larger than the home loan limits updated annually by the Federal Housing Finance Agency.
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If you’re shopping for a mortgage, you may come across the term “conforming loan” and wonder what it means.

A conforming loan is a mortgage that’s at or below loan limits established by the Federal Housing Finance Agency, or FHFA. Conforming loans must also meet standards set by Fannie Mae and Freddie Mac, the government-sponsored companies that purchase mortgages from lenders and help ensure that lenders have a reliable source of money to continue offering home loans.

Guidelines determine how large a conforming loan can be, how a borrower can qualify and what size down payment is required, among other details.

We’ll cover the basics of a conforming loan, how to qualify for one and how a conforming loan is different from a conventional loan.

What is the difference between a conforming and a nonconforming loan?

Conforming loans can be conventional, VA, FHA or USDA loans. Conventional conforming loans must meet a set of standards that allow them to be sold to Fannie Mae or Freddie Mac. VA, FHA, and USDA loans are conforming loans when they’re at or below the program’s loan limits (based on FHFA rules) set for a particular housing market.

Nonconforming loans don’t adhere to those standards. Some exceed the local loan limit. Others may be offered as bad credit loans with alternative credit qualifying options. These mortgages may include risky features and cost more than conforming loans.

What are the basics of a conforming loan?

A conforming loan can’t be larger than the conforming loan limit for the home’s location. This maximum loan size is set by regulators and updated every year. Interest rates on conforming loans may be lower than on nonconforming loans.

A conforming loan can have either a fixed interest rate or an adjustable rate. After an introductory period, the rate on adjustable mortgages is modified on a schedule that you and the lender agree to.

Conforming loans may require a down payment. The down payment must be at least 3% for a fixed-rate mortgage or 5% for an adjustable-rate mortgage.

If you make a down payment of less than 20% on a conventional conforming loan, you typically have to pay for private mortgage insurance, or PMI. This insurance protects your lender if you default on the mortgage.   

What are the benefits of a conforming loan?

Lenders generally are more willing to offer conforming loans because there’s lower risk to the lender. So if you get approved for a conforming loan, you may get a better interest rate than you would with a nonconforming loan.

Another benefit of conforming loans is that they meet widely accepted mortgage standards. If you’re approved for a conforming loan, you can be confident that your application has gone through a rigorous review process that determined you can likely pay back the loan.

How do you qualify for a conforming loan?

In general, you need FICO® credit scores of at least 620 to qualify for a conventional conforming loan. USDA and VA mortgages have no government-specified minimum credit scores.

Lenders also look at your debt-to-income ratio, which is your monthly debt payments divided by your gross monthly income. The mortgage payments you’d make if you’re approved for the mortgage are included with your other monthly payments when calculating this figure. It’s sometimes possible to get approved for a conforming loan with a debt-to-income ratio as high as 50%.

Lenders may require you to make a down payment. For a conventional fixed-rate mortgage, it’s possible to get approved with a down payment as low as 3%, while the minimum downpayment for an adjustable-rate mortgage is 5%.

And you may need to show that you’ll have enough assets, known as reserves, to cover several monthly mortgage payments after you buy the house. Depending on your finances and the type of loan you’re applying for, you could be asked to show that you have up to six months of reserves.

Finally, the size of the loan can’t be higher than the conforming loan limit for the county where the home is located.

Is a conforming loan the same as a conventional loan?

Conventional loans are mortgages offered by private lenders that aren’t part of a government program. Some of these home loans can be purchased by Fannie Mae and Freddie Mac as conforming loans because they adhere to required guidelines. A conventional loan isn’t always a conforming loan.

And not all conforming loans can be labeled “conventional.” FHA, USDA and VA home loan programs feature government guarantees to the lender. Some (not all) of these loan programs have mortgages that can be processed as jumbo loans, which go beyond the loan limits set for conforming loans.

What are the conforming loan limits?

Conforming loan limits are the maximum amounts for conforming loans in different regions. The FHFA sets conforming loan limits each year based on changes in the average U.S. home price.

The conforming loan limits vary depending on a home’s location. There’s a baseline limit that applies to most of the U.S. But in areas where home prices are high, the conforming loan limit can be up to 150% of the baseline, which is called the ceiling limit.

The FHFA set the baseline conforming loan limit for 2022 at $647,200 for single-unit properties. The 2022 limit for high-cost areas was set at $970,800 for single-unit properties.

Next steps: Applying for a conforming loan

If you’re considering applying for a conforming loan, ask yourself these questions:

  • How likely am I to qualify? Check your credit scores to see if you meet Fannie Mae and Freddie Mac FICO score minimums of 620.
  • What type of conforming loan do I need? There may be advantages to applying for an FHA loan, USDA loan or VA loan. For example, FHA loans may have lower upfront costs. USDA loans and VA loans both include a no-money-down option for those who qualify.
  • Do I need to borrow more than the conforming loan limit for the area? You can check the conforming loan limits by county on FHFA’s map. If you’re seeking to borrow a larger amount, you may want to look for a jumbo loan instead.

It may help to ask a few different lenders for loan estimates so you can see how the conforming loans you’re offered compare with your other options.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.