Conforming Loans: The Basics

Buying a home is a huge milestone—but it can also be a daunting process, especially if you’re not familiar with all of the terminology. One term you’re likely to come across is “conforming loan.” But what is a conforming loan?   

A conforming loan by definition is a type of home loan offered by banks and other mortgage lenders. They are part of a larger category of mortgages called conforming, which refers to the size limit of the loan. Conforming loans have a strict limit that must be met in order to qualify. This means that if you’re looking to get a conforming home loan, it’s best to know exactly how much money you can borrow before applying for it.   

A conforming mortgage loan is a type of mortgage that meets the guidelines set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. These two organizations purchase and securitize conventional mortgages to provide more liquidity in the market.   

These loans are available in both fixed-rate and adjustable-rate (ARM) types. The most popular fixed-rate loan terms are the 30-year and 15-year mortgage, while ARMs typically come in 5/1, 7/1, or 10/1 terms.   

The main difference between a conforming loan and a non-conforming loan is the size of the loan. 

Conforming mortgages must adhere to certain size limits, which vary by county. In general, the maximum loan amount for a single-family home is $484,350. They also typically offer lower interest rates than non-conforming loans   

Borrowers with good credit scores (typically 700 or above) and strong income verification will often qualify for conforming loans with low-interest rates and favorable terms. However, even borrowers with less-than-perfect credit may be able to qualify for these loans if they have a larger down payment or can demonstrate strong financial history.  

What Is a Conforming Loan?

In brief, conforming loans are mortgages that conform to the Federal Housing Administration (FHA) guidelines in order to qualify for insurance. Conventional loans do not always conform to these guidelines and therefore do not receive insurance from the FHA.   

These conforming mortgages meet the requirements of Fannie Mae and Freddie Mac. Loans are backed by the government and available in all 50 states. Conforming loan means that they conform to certain loan limits, which vary depending on your area. These two organizations purchase mortgages from lenders, providing them with the capital necessary to continue lending.   

These loans are generally easier to get approved for than conventional loans because they don’t require as much documentation or credit as conventional loan applications do. This makes them appealing to first-time homebuyers who may not have much financial history or a high enough credit score.   

In addition to meeting the maximum loan limit, a conforming loan has other requirements as well relating to creditworthiness, documentation, and eligibility.   

While conforming loans offer many benefits, they are not right for every borrower. Those who do not meet the eligibility requirements or who are seeking a loan amount above the maximum limits will need to look into other options.   

How Does a Conforming Loan Work?

These two government-sponsored enterprises (GSEs) buy mortgages from lenders and package them into securities, which are then sold to investors. The GSEs’ guidelines for conforming loans help ensure that the loans they buy are of high quality and uniformity.   

Conforming loans generally have lower interest rates because they are backed by GSEs and therefore considered to be less risky.    

If you’re considering buying a home, check first to see if you can qualify for them.  

How to Qualify for Conforming Loans?

These mortgage loans have a specific interest rate, term, and payment schedule. In order to qualify for them, you must meet certain qualifications.   

• Your debt-to-income ratio must be below 43%. 
• You need a credit score of 620 or higher. 
• Have a down payment of at least 3.5%. 
• The loan amount you need cannot be more than $484,350 (or $726,525 in high-cost areas).   

If you are able to fulfill all of these, the qualification should not be a problem for you. However, if you need any guidance through this process, we recommend you reach out to a mortgage advisor. 

Advantages and Disadvantages of Conforming Loans

There are both advantages and disadvantages to taking out a conforming loan when buying a home. Like with any other commitment of this kind, you should take your time and weigh carefully all that comes with it. Let’s take a look at some of the most common pros and cons you need to take into consideration:    

Advantages   

• Lower interest rates. Conforming loans usually come with lower interest rates than non-conforming loans, making them more affordable for borrowers who can qualify.   

• Good loan limits. The maximum loan amount that can be borrowed with a conforming loan varies depending on the state you are trying to buy property in, but generally, you should be able to afford a nice home.    

• Better terms and conditions. These loans often come with better terms and conditions than non-conforming loans, making them easier on you as a buyer but also more affordable.   

• Easier to qualify for Lenders who offer these types of loans often have less strict requirements for borrowers because they conform to certain guidelines set by the government.   

• More flexible repayment terms than other types of home loans. Here, you may have the ability to choose a shorter loan term (such as 15 years instead of 30 years) or make extra payments without penalty in order to pay off your loan faster.   

Disadvantages   

However, there are also some potential drawbacks you need to be aware of before taking on this loan:   

• Strict eligibility requirements. In order to qualify for them, borrowers must meet certain criteria set and there is no negotiation here.   

• Potential prepayment penalties. In some cases, these loans come with prepayment penalties, which means borrowers may have to pay extra fees if they pay off their loans early.   

• Depending on the area in which you live, conforming loans may not be available for loans above a certain amount. In high-cost areas, the maximum loan amount that can be considered a conforming loan is much higher than the national limit, so you may need to look into other options if you’re looking to finance a more expensive home.    

• They are a popular choice among home buyers, so they can sometimes be harder to qualify for than other types of loans.    

• Minimum down payment of 3.5% compared with the 2% required by FHA loans—a significant difference if you’re trying to save money on your purchase price.  

How Are Conforming Loans Different from Non-Conforming Loans?

When you borrow money to buy a home, your mortgage lender will give you one of two types of loans: a conforming loan or a non-conforming loan. While both are mortgages, the difference in their structure can make a significant impact on your ability to finance your dream home.   

We already discussed some of the main distinctions between them, but let’s highlight once again the main difference.   

The key component that distinguishes these two types of loans is that conforming loans are backed by the government and non-conforming ones aren’t. Most conforming loans fall under certain guidelines relating to the price and amount so they’re more common than their less conventional counterparts.   

In case you need a bigger amount to purchase the house of your dreams, choosing a non-conforming loan would be a better option, as the limits here are set by individual lenders.

Are Conforming Loans and Conventional Loans the Same?

Yes and no. Conventional loans and conforming loans are considered by many to be the same type of loan because there is overlap. You should know that all conforming loans are conventional loans, but not all conventional loans are conforming loans.   

Let’s back up and make sure we’re on the same page here. A conventional mortgage is one that requires no more than a 20 percent down payment from you—and comes with an interest rate that’s usually higher than those offered with other types of loans (like FHA). Conventional loans are also known as “conforming” mortgages because they conform to certain standards set by Fannie Mae and Freddie Mac. That said, there are several kinds of conventional mortgages out there: fixed-rate loans and adjustable-rate loans; 30-year and 15-year terms; 5/1 hybrid ARM options. If on the other hand, they do not conform to a certain standard, they are not conforming loans.   

How Much Can You Get with Conforming Loans?

If you want to find out what the conforming loan limits are in your area, try simply searching it online. The results will show you an estimated maximum amount that a lender will lend to you based on the type of property and its location.   

The minimum and maximum loan amounts depend on both the type of property being bought and income levels. For example, if you are buying a single-family home with no more than four units, then your minimum conforming loan limit would be $453 thousand (or $625k in Alaska). If your household income is below 80% of the median income for where you live (for instance: San Francisco’s median is about $140k), then this figure could go up as high as $679 thousand (or as low as $300k in Alaska).   

Final Thoughts

In case you are looking for a new home and need help with your financing, then conforming loans may be the answer. They are designed to help you get into the house of your dreams. With the right information and guidance from an experienced lender, you will be able to find the right loan that fits your needs and budget.  

But, don’t overlook other financing options out there, as this one isn’t of course suitable for everyone. Use the information in this article as a starting point and do more research to determine which mortgage will work best for you.