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If you're investigating mortgage options, you'll likely run across the terms "conventional loan" and "conforming loan," and may wonder which is better for you. Deciding isn't really an either-or proposition, however, because there's vast overlap between the two loan types:
- All conforming loans are conventional mortgages.
- Nearly all conventional mortgages issued in the U.S. are conforming loans.
Here's an overview of both loan types, and how they relate to one another.
What Is a Conventional Loan?
A conventional loan is a mortgage loan that isn't backed by the federal government. In other words, it is any mortgage issued by a private lender or financial institution that isn't guaranteed by the Federal Housing Administration (FHA loan), Department of Veterans Affairs (VA loan) or Department of Agriculture (USDA loan).
The vast majority of mortgages issued in the U.S. are conventional loans, with roughly 3 in 4 home purchases in the U.S. financed through conventional loans, according to U.S. Census Bureau data.
Within the scope of federal guidelines, the private lenders that issue conventional loans have significant freedom to determine their own lending criteria based on factors such as income and credit score, and to set the interest rates and fees they charge for loans.
What Is a Conforming Loan?
A conforming loan is a conventional mortgage that meets eligibility criteria for purchase by Fannie Mae and Freddie Mac, the federally chartered corporations that buy the vast majority of mortgage contracts issued in the U.S. Fannie and Freddie help ensure that banks, credit unions and other lenders have funds available to lend by buying up existing mortgage contracts and converting batches of them into mortgage backed securities (MBS), investment instruments that are traded on public exchanges, much like stocks.
Each year, the Federal Housing Finance Agency (FHFA), the government authority that regulates Fannie and Freddie, publishes criteria that mortgage loans must meet in order for Fannie or Freddie to buy them. For 2023, those criteria are:
- Loan applicants must have a minimum FICO® Score☉ of 620. The FICO® Score is the credit score used by 90% of top lenders.
- Loan amounts cannot exceed the conforming loan limit (CLL) for the county in which the purchased property is located. The FHFA sets CLLs annually, based on local median housing prices. For 2023, CLL for a single-family home in most of the country is $726,000, but loan amounts of up to $1,089,300 are considered conforming in counties with the highest median home costs nationwide.
- Borrowers must make a minimum down payment of 3% of the purchase price, and pay private mortgage insurance (PMI) premiums if the down payment is less than 20% of the home price.
- Borrowers must have a maximum debt-to-income ratio (DTI) of 45% (or up to 50% with higher down payments and/or a higher FICO® Score). Your DTI ratio is the percentage of your monthly pretax income that's used to pay debts. Lenders use DTI as a measure of your ability to afford payments on new loans.
Non-Conforming Conventional Loans
Because some borrowers need loans that fall outside conforming-loan eligibility limits, a variety of non-conforming conventional loans are available, including:
- Jumbo loans: A jumbo loan, or jumbo mortgage is a loan used to purchase a home with a market price that exceeds the loan limit amount for its location. Lenders typically impose higher credit score and income requirements on these loans and may charge higher interest rates than they would on a conforming loan to an applicant with similar borrowing qualifications.
- Interest-only mortgages: With an interest-only mortgage, for a fixed number of years you make relatively low payments that only go toward interest on the loan. At the end of the interest-only period, you must switch to higher payments that cover both interest and principal on the loan. Typically subject to strict lending requirements, these loans are fairly rare and often come with higher-than-typical interest rates that are adjustable and can be difficult to predict.
What Type of Mortgage Loan Is Best?
When deciding which mortgage type is best for you, it's wise to consider the full range of opportunities available to you.
- Conforming conventional loan: This will likely offer the greatest range of options, assuming:
- You're shopping for a home priced at or below the conforming loan limit for your community.
- You have strong credit, adequate income and moderate (or less) debt.
- You can afford to make a substantial down payment.
- Government-backed loan: If you meet the criteria for a government-backed mortgage such as an FHA, VA or USDA loan, you may be able to get into a home with a relatively low down payment and credit score. But these loans may have fees and interest rates that could cost you more over the life of a loan than you'd pay on a conventional mortgage.
- Jumbo loan: If you seek a home that exceeds 115% of the median home price in your community, you likely will not qualify for a conforming loan, and should investigate jumbo mortgage options.
The Bottom Line
Before seeking a mortgage, it's always wise to review your credit reports and check your credit score to understand how favorably lenders are likely to view your application. Check your FICO® Score from Experian for free to know where you stand and, if appropriate, take time to spruce up your credit profile before you apply for a mortgage.