What Is a Conforming Loan?

What Is a Conforming Loan?

A conforming loan is a mortgage that conforms to rules determined by Fannie Mae and Freddie Mac, which are, in turn, regulated by the Federal Housing Finance Agency (FHFA). Conforming loans are the most common mortgage loan type in the U.S. They include loan limits based on the average cost of living in your area and eligibility guidelines including a minimum FICO^® Score^☉ of 620 and a maximum debt-to-income ratio (DTI) of 45% to 50%. DTI shows lenders how much of your monthly income goes toward debt payments and gives them an idea of how much loan you can afford.

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What Is a Non-Conforming Loan?

A non-conforming loan—such as a jumbo loan or government-backed loan—does not meet FHFA standards for conforming loans. They are not purchased or owned by Fannie Mae and Freddie Mac. A non-conforming loan may be larger than the limits set for conforming loans, or may be targeted at borrowers with poor credit or those with unique financial circumstances, such as the self-employed.

How Do Conforming Loans Work?

Conforming loans are widely available from lenders. By adhering to Fannie Mae and Freddie Mac eligibility standards, they meet criteria that allow them to be sold later on in the mortgage market. That makes them less risky for lenders and typically more affordable than non-conforming loans as a result. Unlike FHA, VA and USDA and home loans, they're not insured by a government agency.

Conforming loans can have fixed rates or adjustable rates. A fixed interest rate remains the same for the entire loan term. An adjustable-rate mortgage (ARM) offers a fixed interest rate for a period of time at the start of the loan term, which then switches to a floating rate that changes according to economic conditions. Often, you'll pay a fixed rate for the first five years of a 30-year adjustable-rate mortgage.

Conforming Loan Limits and Rules

Typical guidelines for a conforming loan include:

• Loan maximum: In most counties, you can borrow up to $766,550 on a conforming mortgage. In higher-cost counties, the loan maximum ranges from $766,551 to $950,000 or $950,001 to $1,149,824. The highest-cost counties have a loan maximum of $1,149,825. You can find your county's limit using the FHFA's Conforming Loan Limit Values Map.
• Mortgage insurance: Your lender will generally require that you pay private mortgage insurance (PMI) if you make a down payment of less than 20% of the home's sale price.
• Minimum credit score: You'll need a credit score of at least 620. The credit score versions that conforming loan lenders typically use are: FICO^® Score 2, or Experian/Fair Isaac Risk Model v2; FICO^® Score 5, or Equifax Beacon 5; and FICO^® Score 4, or TransUnion FICO Risk Score 04.
• Maximum debt-to-income ratio: Lenders want to see a DTI of less than 36%, but strong credit can push the maximum DTI to 45%. The size of your down payment can also affect your individual DTI requirements. The highest DTI allowed is 50%.
• Minimum down payment: You can make a down payment of as little as 3% on conforming loans, though lenders may require a higher amount. You'll pay mortgage insurance if you make a down payment of less than 20%.

Learn more >> Conforming Loan Limits

Pros and Cons of Conforming Loans

A conforming loan has both benefits and drawbacks. Before you choose one, consider what you stand to gain and what could make a non-conforming loan a better choice for you.

Pros

• Easier eligibility requirements: You can qualify for a conforming loan with a credit score of at least 620, whereas jumbo loan lenders require a credit score of at least 700.
• Lower interest rates: Conforming loans come with lower interest rates than non-conforming loans. They're less risky for lenders, since they're eligible to be guaranteed by Fannie Mae or Freddie Mac. As of mid-September 2024, the average interest rate on a 30-year fixed-rate mortgage was 6.09%, compared with 6.542% for 30-year fixed-rate jumbo loans, according to the Federal Reserve Bank of St. Louis.
• Lower down payment requirements: You can get a conforming loan with a down payment of 3%. That's less than the minimum of 3.5% down on an FHA loan or 10% down on a jumbo loan.
• Safer for borrowers:According to the Consumer Financial Protection Bureau, non-conforming loans were the source of many borrowers' challenges during the 2008 housing crisis. Depending on the type of non-conforming loan, they may have features that put borrowers at risk of not being able to afford their payments.

Cons

• Lower borrowing limits:If you require a mortgage that's larger than the FHFA's limits, you won't qualify for a conforming loan.
• Limited options for borrowers with fair or poor credit: While conforming loans have easier eligibility requirements than jumbo loans, there are government-backed programs that fall into the non-conforming category that may work better for poor-credit borrowers. FHA loans, for example, allow for a minimum credit score of 500 if your down payment is at least 10%.

Conforming vs. Conventional Loans

Conforming loans are a type of conventional loan. That means all conforming loans are conventional, and you don't need to choose between the two.

Conventional loans are any mortgages that are not backed by the FHA (an FHA loan), USDA (a USDA loan) or VA (a VA loan). Within the category of conventional loans, there are conforming and non-conforming loans, which either adhere to Fannie Mae and Freddie Mac criteria or don't.

How to Get a Conforming Loan

To apply for a conforming loan, take these steps.

1. Assess Your Credit

To best position yourself for loan approval, check your credit reports from all three credit bureaus (Experian, TransUnion and Equifax), available for free at AnnualCreditReport.com. Make sure the data is accurate. Check your FICO^® Score, too, to get an idea of the score lenders will see.

It's also important to stop applying for other new credit, hold off on big purchases, reduce your credit card debt and make sure you pay every bill on time in the lead-up to a mortgage application.

Learn more >> How to Build Credit to Buy a House

2. Search for Lenders

Since conforming conventional loans are popular mortgage types, many lenders offer them. Compare options among national and community banks, credit unions and online lenders to see which offer the best rates considering your individual credit score, down payment and DTI.

Learn more >> How to Shop for a Mortgage

3. Get Preapproved

Apply for mortgage preapproval by submitting your personal information including income, employment history, credit score, credit file, tax returns and debt totals. You'll then receive a mortgage preapproval letter, which shows sellers you are eligible to borrow and how much you're preliminarily approved for.

4. Choose a Loan Type and Apply

After getting preapproved, you can work with a mortgage broker or loan officer to choose a loan type to officially apply for. At this point, if a conforming conventional loan is best for you, you'll apply, and if approved you'll receive a final offer with an interest rate and fee schedule to consider. Use a mortgage calculator to make sure you understand the size of your monthly payment, taking into account your down payment, loan term and interest rate.

Learn more >> What Type of Mortgage Loan Is Best?

The Bottom Line

Conforming loans are a popular choice for homebuyers due to their lower interest rates, lower down payment requirements and safer borrowing structure than non-conforming loans. But if you need a particularly large loan or are a better candidate for a government-backed loan such as an FHA, USDA or VA loan, a non-conforming mortgage is worth looking into. The best mortgage for you is the one that gets you the most affordable deal for the long term while weighing your credit, down payment and other personal factors.