What Is a Conforming Loan and Is It My Best Option?

If you’re considering purchasing a home or trying to refinance your mortgage, you’ve likely encountered lenders advertising some of their products as conforming loans. But precisely what is a conforming loan, and is it the correct type of mortgage for you?

What Is a Conforming Loan?

A conforming loan is any type of mortgage that meets or “conforms” to the lending guidelines established by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are government-sponsored companies that operate under the oversight of the Federal Housing Finance Agency (FHFA). Their purpose is to help make mortgages more accessible.

They do this by buying mortgages from lenders, bundling them into securities, and selling them to investors. Fannie Mae and Freddie Mac allow lenders to offer more loans by buying their conforming loans, which gives the lenders back the money they initially lent out. With this returned capital, lenders can then provide new loans to other borrowers, maintaining a continuous cycle of lending.

Conforming vs. Conventional Loans

It's common to hear the terms conforming and conventional used seemingly interchangeably – even within the mortgage industry. In reality, however, there is a difference. Conforming loans meet Fannie Mae and Freddie Mac standards. 'Conventional' means the loans are not insured or guaranteed by the government, like FHA, VA or USDA loans.

This means all conforming mortgages are conventional loans, but not all conventional loans are conforming. Conforming loans meet specific guidelines Fannie Mae and Freddie Mac set, such as loan size limits. On the other hand, conventional loans can also include loans that don't meet these guidelines, like a bank’s special jumbo loan, which is for amounts higher than the conforming loan limits.

Conforming vs. Non-Conforming Loans

Loans that don’t conform to guidelines set by Fannie Mae and Freddie Mac are referred to as non-conforming. While 'non-conforming' might sound negative, it simply means that these loans don't meet the specific guidelines set by Fannie Mae and Freddie Mac. As a result, they can't be purchased, securitized, and sold to institutional investors in the same way conforming loans can.

Some popular examples of non-conforming mortgages include:

• Government-backed loans insured by the FHA, VA, or USDA

• Jumbo mortgages in excess of FHFA-specified limits

• Non-qualified mortgage programs established by individual lenders

Advantages of Conforming Loans

Conforming loans make up the majority of all residential mortgages for a reason. Some of their most significant advantages are:

• Lower Costs for Well-Qualified Borrowers – Conforming loans generally have lower costs for most well-qualified borrowers. Government-backed mortgages may advertise lower interest rates, but actual costs are likely to end up higher due to permanent monthly mortgage insurance requirements.

• No UFMIP or Funding/Guarantee Fee – Closing costs can be lower than non-conforming loans because you won’t pay an upfront mortgage insurance premium (UFMIP) like with FHA loans or a Funding/Guarantee Fee like with VA and USDA loans.

• Available for Non-Primary Residences – Most popular non-conforming loans are only available for your primary residence. Conforming loans allow you to purchase or refinance a second home or investment property.

• Sellers May Be More Receptive to Conforming Loan Offers – Many sellers perceive a preapproval for a conforming loan to be more secure and likelier to close than offers with other financing types.

Disadvantages of Conforming Loans

Conforming mortgages aren’t without their downsides, however.

• Higher Credit Score Requirements – Conforming loans almost always require a minimum credit score of 620. By contrast, a buyer with a 10% down payment could qualify for a non-conforming FHA loan with a credit score as low as 500.

• Maximum Loan Limits – While conforming loan limits are adjusted annually, they won't always fit every buyer's needs. If you're shopping for a mortgage above your area's limit, you'll likely need to consider a jumbo loan instead.

• Mortgage Insurance Requirements – Even though you can qualify for a conforming loan with a down payment of between 3% and 5%, you’ll still be required to pay for private mortgage insurance until you obtain at least 20% equity. This cost can be substantially higher for lower-credit borrowers.
  

No Streamline Refinance Options – Some types of non-conforming loans let you refinance without going through an in-depth credit check, reverifying your income, or ordering a new appraisal. Unfortunately, conforming lenders do not currently offer any streamline refinance options.

Guidelines for Conforming Loans

The guidelines for conforming loans are based on the qualifications of the borrower applying for the loan and the property that’s being mortgaged.

Property Types Eligible for Conforming Loans

You can get a conforming loan for residential properties with up to four individual units. This could be:

• Single-family detached homes

• Manufactured homes

• Condos

• Duplex, triplexes, and fourplexes

You don't even necessarily need to live at the property to qualify for a conforming mortgage. You can also take out a loan on a second home or income-generating rental.

Credit Score for Conforming Loans

Conforming mortgages typically require borrowers to have a credit score of at least 620. This is higher than government-backed alternatives like FHA loans, which offer a 3.5% down payment option with a score of just 580.

However, it is possible for someone without a credit score to still qualify for a conforming loan based on a non-traditional credit history. Plus, some homeowners looking to refinance their existing loans may be eligible for the RefiNow and Refi Possible programs, which have no minimum score requirements.

Conforming Loan Limits

Loan limits for conforming mortgages are established by the FHFA. These ceilings are adjusted annually to align with changing home values. For 2024, the maximum conforming loan limit for a single-family home is $766,550 in most parts of the United States.

This figure is higher, however, for properties with two, three, or four units, as well as those in federally designated high-cost areas.

Debt-to-Income Ratio for Conforming Loans

Conforming loan guidelines recommend that borrowers have a maximum debt-to-income (DTI) ratio of 45%. This means up to 45% of your qualifying income can be allocated towards your monthly housing expenses and other installment debt obligations.

In addition to your mortgage and related costs, some of the other types of monthly payments that can impact your DTI include:

• Car loans

• Student loans

• Personal loans

• Credit card minimums

• Court-ordered settlements

In some cases, particularly for applicants with a high credit score, substantial down payment, or considerable other assets, getting approved for a conforming loan with a ratio as high as 50% may be possible.

However, for the best conforming rates and highest chances of approval, you should aim for a DTI of 36%.

Loan-to-Value Ratio for Conforming Loans

A mortgage's loan-to-value (LTV) ratio is the percentage of the property's appraised value that is being borrowed. Conforming lenders allow most applicants to have an LTV as high as 95%. However, first-time homebuyers and lower-income borrowers may qualify for a loan-to-value ratio as high as 97%. These LTVs equate to a minimum down payment ranging from 3% to 5% for purchase loans.

Borrowers eligible for down payment assistance, such as Fannie Mae's Community Seconds program, may be able to borrow a total combined LTV as high as 105%.

Frequently Asked Questions About Conforming Loans

Still trying to determine precisely what a conforming loan is? Here are some answers to a few of the most frequently asked conforming mortgage questions.

Is a Conforming Loan an FHA Loan?

No. Conforming loans are not backed by a government agency such as the FHA. Guidelines for FHA mortgages do not fall within conforming standards, such as the minimum borrower credit score of 580 (500 in some cases) and the maximum allowed DTI of up to 56.9%.

What Is a Conforming Fixed Loan?

Conforming loans can be structured with either a fixed or adjustable rate. A conforming fixed loan has an interest rate that's locked in with equal monthly payments for the life of the loan.

By contrast, a conforming adjustable loan may have an interest rate that is fixed for a set period but then adjusts regularly in tandem with trends in the overall financial markets. Borrowers with adjustable loans may see their payments change over time.

Do Conforming Loans Have the Best Rates?

Conforming loans will generally have the best overall rates for most well-qualified borrowers. While government-backed non-conforming mortgages often advertise lower interest rates than comparable conforming loans, their total costs are commonly higher. This is due to mortgage insurance requirements and program funding fees.

However, some non-conforming loans – particularly those insured by the VA or issued to borrowers with bad credit – may have better actual rates in certain situations.

What’s the Maximum Amount for a Conforming Loan?

The maximum amount for a conforming loan is set annually by the FHFA. For a single-family home in most areas of the country, the 2024 conforming loan limit is $766,550. If you live in a high-cost area, your maximum loan amount for a one-unit property could be as high as $1,149,825. Four-unit residential properties in high-cost areas could qualify for a conforming loan as large as $2,211,600.

Is a Conforming Loan Right for Me?

Borrowers who meet the requirements for a conforming loan often find that the upfront costs and annual percentage rate are more favorable than many non-conforming options. The approval process can even be simpler than other loan types, especially for highly qualified applicants. You also don't need to meet eligibility requirements like with VA loans or deal with the income limits attached to USDA loans.

To find out if a conforming loan is right for you, check out today’s current interest rates and apply with a reputable lender offering conforming mortgages in your area.