What Is a Conforming Loan?
Conforming loans are home loans that meet a specific set of guidelines created by federal regulators, and are the most common type of mortgage loan. If you meet the requirements, you can qualify for a conforming loan that might get you a lower interest rate and lower monthly house payment.
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Conforming loans: what are they?
Conforming loans are mortgages that follow a body of rules set by the Federal Housing Finance Agency (FHFA), a government agency that regulates mortgage markets. Most mortgages in the U.S. are conforming, meaning that they qualify to be purchased and guaranteed by Fannie Mae and Freddie Mac.
These government-supported enterprises (GSEs) may carry cute nicknames, but they play an important role in the economy. Fannie Mae and Freddie Mac purchase loans packaged into groups known as securities and sell them to investors. When investors purchase the securities, they typically also receive a guarantee that Fannie Mae and Freddie Mac will pay if a homeowner defaults. This guarantee diversifies who carries the risk of mortgage loans and, by reducing the risk carried by lenders, helps loans have lower interest rates.
What is a non-conforming loan?
Some of the most common non-conforming loan types are:
Government-backed loans Loans backed by the Department of Veterans Affairs (VA), Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) are popular non-conforming options.
Jumbo loans Loans for luxury houses or homes in high-cost-of-living areas may exceed the FHFA loan limits, which makes them non-conforming.
Borrowers looking for niche products that fit their unique needs may also run into non-conforming products like holding mortgages, hard money loans, purchase money mortgages and interest-only mortgages.
The fact that a loan is non-conforming doesn’t necessarily mean that it’s a bad or predatory loan. It just means that the borrower has fewer built-in protections and may be taking on a loan with higher risk.
What are conforming loan limits?
One big rule mortgages must follow in order to be conforming is the “conforming loan limit,” a cap placed on how large a loan can be. The maximum dollar amount FHFA guidelines allow you to borrow for a residential mortgage adjusts each year based on the median home value in each U.S. county and varies depending on the property’s location.
The 2023 conforming loan limit for one-unit properties in most of the U.S. is $726,200, but can go up to just over a million — $1,089,300 — in high-cost areas.
Conforming loan limits for 2023
Conforming loan limits 2023
|Number of units||Most of the continental U.S. and Puerto Rico||Alaska, Guam, Hawaii and the U.S. Virgin Islands|
Exceptions: Conforming loan limits for high-cost areas
Some parts of the U.S. are actually allowed to have a higher loan limit than the rest of the continental U.S and Puerto Rico. In areas the FHFA deems to be “high cost” based on an area’s median home values, the top limit for a single-family home is $1,089,300 instead of $726,200. Areas in the continental U.S. that qualify for this special, higher limit include San Francisco, New York and Washington, D.C. Look up your county’s limit on the FHFA’s interactive map or on our map below.
Conforming loan limits for 2023 by county and county equivalent
Conforming loan benefits
Lower APR Conforming loans are beneficial because it helps buyers to qualify for the lowest possible interest rates and therefore lower monthly payments.
Choice of lender If a lender has the option to sell your mortgage to Fannie Mae or Freddie Mac, it’s a safer investment for them. Many lenders prefer to work with mortgages that meet the conforming loan limit. If you plan to borrow within the limit, you have a wide range of lenders to choose from.
Property-type flexibility Conforming loans aren’t restricted to primary residences; they’re also available for investment properties, vacation homes and second homes.
Removable mortgage insurance The guidelines for conforming loans allow you to get rid of your private mortgage insurance once you reach 20% equity.
Lower interest rates The risk to a lender is higher with a non-conforming loan, so they usually have higher interest rates than conforming loans.
Standardized disclosures Lenders issuing conforming loans are required to use standardized Loan Estimate and Closing Disclosure forms. While this may not seem like an exciting perk, it’s a valuable protection for borrowers because it allows them to see loan information in a form that is understandable to a lay person. These forms also allow potential borrowers to more effectively compare loan offers.
Conforming vs. conventional loans
While many people use “conforming” and “conventional” as if they were equivalent terms, this isn’t quite accurate. All conforming loans are conventional loans, but only some conventional loans are conforming.
→ Conforming loans are defined by the fact that they adhere to FHFA guidelines. Fannie Mae and Freddie Mac follow these rules, but they certainly aren’t universally heeded — in fact, many government-backed loans aren’t conforming. There are many non-conforming conventional loans available that cater to people with specific needs, for instance borrowers with bad credit, those who have experienced bankruptcy, who need to borrow a large amount, or who want a low down payment.
→ Conventional loans are defined by who issues them. Any loan issued outside of a government loan program — e.g., a bank, credit union or mortgage banker — is a conventional loan.
How to qualify for a conforming loan: conventional loan requirements
|Minimum down payment||3%|
|Minimum credit score||620|
|Mortgage insurance||Required until you reach 20% equity|
|Maximum DTI||45% back-end ratio*|
|Loan limit (single-family)||$726,200|
*there may be exceptions for borrowers who can show significant cash reserves, residual income or other mitigating factors
Jumbo loans vs. conventional loans
Non-conforming morgages that exceed the maximum loan amount allowed by FHFA guidelines are called jumbo loans. They may have higher interest rates and fees. A jumbo mortgage typically requires:
- A higher down payment, usually 20% or more
- A high credit score — 700 or higher
- A low DTI ratio — 45% or lower
- At least several months of cash reserves
Jumbo loans allow homebuyers to borrow more money but traditionally come at a higher price. However, in 2022 the housing market displayed a rather uncommon trend: jumbo loan rates actually fell below conventional rates, offering a savings of up to 0.3326% in April of 2022. Since then, the gap between jumbo and conventional loans has narrowed, but rates change daily so be sure to check current mortgage rates as you enter your home-buying journey.