Key Takeaways
Conforming loans are mortgages that meet standards set by the Federal Housing Finance Agency (FHFA). They can be purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. These loans have limitations and guidelines regarding the borrower's credit profile, loan amount, down payment, and property type. The FHFA adjusts the conforming loan limits each November to account for changes in the housing market.
If you're considering a mortgage, you may have heard the term “conforming loan.” But what does it mean, how do they work, and why should you consider a conforming loan? Here's everything you need to know about conforming loans and how they can benefit you.
What is a conforming loan?
A conforming loan is a type of conventional mortgage that meets standards set by the Federal Housing Finance Agency (FHFA). Meeting these standards makes these loans available for purchase by Fannie Mae and Freddie Mac. By purchasing the mortgages, Fannie and Freddie reduce the lender's risk. This practice frees up lenders to use more of their money to fund additional mortgages.
As a result, most mortgage lenders offer conforming loans, and what they offer is primarily conforming loans.
Conforming loans come with fixed or adjustable rate options and term lengths vary, with 15- and 30-year terms being the most popular.
Conforming Loan Limits and Rules
For a mortgage to be considered conforming and eligible for purchase by Fannie Mae and Freddie Mac, it must meet certain criteria. These requirements, which pertain to both the borrower and the loan itself, include:
Loan Limit – In 2024, the limit is $766,550 for a single-family home in most markets, but can go up to $1,149,825 in high-cost areas Borrower Credit Score – At least 620 Borrower Debt Ratio – Ideally, your debt-to-income ratio (DTI) is 36% or less, but it can go up to 50% with certain compensating factors Down Payment/Home Equity – At least 3% down payment for purchases and 5% equity for refinancing. However, if you put down less than 20% or have less equity, you’ll have to pay private mortgage insurance (PMI) and your interest rate will be higher Loan-to-Value (LTV) Ratio – Up to 97% depending on the mortgage and borrower
How FHFA Regulates Conforming Loans
The FHFA compares the increase or decrease in the average home price, as indicated by the Home Price Index, from October to October each year. It uses this percentage change as a basis to adjust loan limits. This method ensures that loan limits reflect current realities in the real estate market and that buyers still have access to conforming mortgages.
Pros and Cons of Conforming Loans
Strong Points
Low down payment: For a conforming loan, the minimum down payment is 3 percent. This amount is much lower than a non-conforming jumbo loan, which is typically 10 (at least) to 20 percent or 25 percent. More accessible: Because conforming loans are popular, you have more lenders to choose from when comparing products. Plus, because the process is standardized, a conforming loan can potentially make it quicker and easier to pay off your home. Avoid mortgage insurance: If you put at least 20 percent down on a traditional conforming loan, you won't have to pay private mortgage insurance. Even if you don't put down 20 percent, you can eliminate PMI if you have 20 percent of your own funds. This cost can be significant, as the average cost of PMI is 0.46 percent to 1.5 percent of the monthly loan amount, according to an Urban Institute analysis.
Cons
Borrowing limit: The home you want to buy may exceed the conforming loan limit, especially if you're in a high-cost market (but not a designated high-cost market). You need a higher credit score: Traditional conforming loans require a credit score of 620 or higher, but some government loans are available with scores as low as 500. Debt limit: Your debt-to-income ratio (DTI) must meet conforming loan standards set by the FHFA. The maximum DTI ratio is usually 36 percent. If you have other “compensating factors,” such as a higher credit score or significant savings, it can stretch to 43 percent or 50 percent, but this is rare.
Conforming and Non-Conforming Loans
Conforming loans meet FHFA standards for borrower credit, down payment, and loan amount. Fannie Mae and Freddie Mac only purchase conforming conventional loans. Non-conforming loans do not meet these standards, so Fannie and Freddie will not purchase them from lenders.
However, the fact that a loan is non-conforming doesn't mean it's bad. It just means that it doesn't meet the standards for purchase by government-backed companies. For example, to buy a home that exceeds the conforming loan limit for your area, you may need a jumbo loan, one of the most common non-conforming types.
Additionally, some mortgage lenders offer non-conforming loan options tailored to borrowers with questionable histories, such as credit problems or recent bankruptcies. Because lenders don't have to meet federal standards, they have more leeway in approving applicants.
Of course, they have more discretion in setting fees, terms, and other conditions. Non-conforming loans often have higher interest rates and higher fees than conforming loans.
Conforming vs. Conventional Loans
Conforming loans and conventional loans both refer to private (non-government) and commercial mortgages, and their meanings overlap.
However, “conventional loan” is a broader category. A conforming loan is a loan that meets certain criteria set by the FHFA, including the conforming loan limit. A conventional loan is a loan that is not guaranteed or insured by the government (FHA, VA, USDA loans). Conventional loans can be either conforming or non-conforming.
Simply put, all conforming loans are conventional loans, but not all conventional loans are conforming loans.
How to Get the Best Matching Loan for You
There are several steps you can take to ensure you get the best conforming loan for your situation.
1. Check your credit report
Review your credit report and history as soon as possible at AnnualCreditReport.com. Check your report carefully for outdated items and factual errors. Even small issues can lower your credit score, so dispute any errors you find.
2. Organize your documents
Have your documents ready for the mortgage application process: Although lenders can currently get a lot of information directly from banks and the IRS, it's a good idea to have documents like pay stubs, bank statements, retirement accounts, W-2 forms, tax returns, and more on hand.
3. Compare loan rates
Take the time to compare mortgage offers from at least three different lenders. Consider your needs and preferences as you create a shortlist of lenders. For example, start with your bank (if they offer mortgages), or consider credit unions and online lenders. Beyond the general terms of the loan, take a closer look at each lender's fees and points.
Different lenders have different loan products available, and the same type of loan may have different terms depending on the borrower's creditworthiness.
You can find conforming loan rates on Bankrate, which provides daily mortgage rates for both 30-year and 15-year loans. When comparing mortgage rates, consider the following:
If you think interest rates will rise in the next month or so, you can also lock in your interest rate to secure the lowest possible rate. Interest rates vary depending on your qualifications as a borrower. Be wary of interest rates that seem too low to be true, given your financial situation. If you come across a low interest rate, it may be offset by a larger upfront cost. Carefully evaluate the full cost of the loan (interest and fees), as expressed in the annual percentage rate (APR). Remember that you can get a fixed-rate or adjustable-rate mortgage. Fixed-rate mortgages usually range from 10 to 30 years, and your interest rate stays the same for the life of the loan. With an adjustable-rate mortgage, your interest rate is fixed for an introductory period, usually 3 to 10 years, and is usually lower than a fixed-rate loan. After that period, your interest rate will fluctuate based on market factors.
4. Get pre-approved
Once you've found a lender you're willing to lend to, you can get pre-approved for a loan. Pre-approval can help speed up the lending process and catch any credit issues before they become an issue when you officially apply for a mortgage. Getting pre-approved can also help show home sellers that you're a serious buyer.
5. Avoid excess spending
Lenders will be closely monitoring your credit and spending until your mortgage closing date. Think of the period between when you apply for your loan and when it closes as a “quiet” period where you spend as little as possible. Don't apply for new credit, like credit cards or personal loans, and avoid making any unnecessary large purchases while your mortgage application is being processed. This will help ensure that your closing process goes smoothly and that you receive the loan you expect.
Conforming Loan FAQs
Why are conforming loan limits set annually?
The conforming loan limit is set annually by the FHFA to take into account changes in the housing market (increasing or falling home prices). By adjusting the base loan limit, the FHFA ensures that the average home buyer can secure a conforming conventional mortgage despite rising residential real estate prices.
For 2024, FHFA increased the conforming loan limit to $766,552,000. In high-cost areas, the limit is even higher, up to $1,149,825. This adjustment is part of FHFA's efforts to help the average buyer gain access to mortgage financing.
How flexible are conforming loan limits?
Unfortunately, one of the constants of a conforming loan is the loan limit, which means there's a set amount you can borrow, and you can't borrow more than that. One workaround is a piggyback loan, a smaller loan on top of a larger loan that, when combined, adds up to enough to buy a home.
Can I qualify for a conforming loan with a lower down payment?
Conforming loans allow for lower down payments as long as the borrower pays private mortgage insurance (PMI). Paying PMI allows you to get a conforming loan with a down payment as low as 3% if you have a Conventional 97, Fannie Mae HomeReady, Freddie Mac HomeOne, or Home Possible mortgage.
How are debt ratios assessed?
To qualify for a conforming loan, lenders will evaluate your monthly debt against your income. There are two debt ratio measures, sometimes called front-end and back-end. The front-end ratio measures how much of your gross monthly income goes towards your mortgage, including monthly payments (principal and interest), property taxes, insurance, and HOA fees (if applicable). Typically, lenders look for a front-end ratio of 28 percent or less. The back-end ratio, also known as the debt-to-income ratio (DTI), includes your front-end ratio plus other monthly obligations, such as car loans, student loans, personal loans, and credit card payments (use this handy calculator to calculate your DTI). The maximum back-end ratio you can have to be considered for a conforming loan is 36 percent. It's possible to get a conforming loan with a higher debt ratio, but a lower one is generally better for both borrowers and lenders.
Additional reporting by Maya Dollarhyde