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When you're shopping for a home mortgage, you may come across something known as a conforming loan. A conforming loan is a mortgage that conforms to the rules of Fannie Mae and Freddie Mac, the government-backed mortgage companies that own many of the home loans in the U.S.
The Federal Housing Finance Agency (FHFA) establishes the loan standards for a conforming loan, a type of conventional loan, which include a cap on the amount you can borrow and a minimum credit score.
By contrast, a non-conforming loan—such as a jumbo loan or government-backed loan—does not meet FHFA standards for conforming loans and thus these loans are not purchased or owned by Fannie Mae and Freddie Mac.
Here, we unlock the details of conforming loans.
How Does a Conforming Loan Work?
A conforming loan is the most common kind of mortgage loan. Conforming loans are widely available from lenders. But, unlike FHA, VA and USDA and home loans, they're not insured or guaranteed by the government. Typical guidelines for a conforming loan include:
- Minimum FICO® Score☉ of 620.
- Debt-to-income ratio up to 45% (although a high credit score or large stash of cash may push the ratio to 50%).
- Down payment as low as 3% of the loan amount.
- Loan amount falls under Fannie Mae or Freddie Mac limits.
The biggest difference between a conforming loan and a non-conforming loan is a lower borrowing limit. For 2021, the general limit to buy a single-family home with a conforming loan is $548,250, though the limit rises as high as $822,375 in some high-cost areas of the U.S.
To find the borrowing limit for a conforming loan where you plan to buy a home, use the Federal Housing Finance Agency's interactive mapping tool.
|Conforming Loan vs. Non-Conforming Loan|
|Loan limit for single-family home||Minimum credit score||Debt-to-income ratio||Down payment|
|Conforming loan||Up to $548,250 in most areas (2021)||620||Up to 50%||At least 3% of purchase price|
|Non-conforming loan||More than $548,250 in most areas (2021)||680||Less than 43%||Usually at least 20% of purchase price|
Pros and Cons of Conforming Loans
As with any type of loan, a conforming loan comes with potential pros and cons.
Among the potential benfits as compared with non-conforming loans:
- Easier qualification
- Lower interest rate
- Lower FICO® Score requirement (620 versus 680 for most jumbo, or non-conforming, loans)
- Lower down payment
Why are conforming loans often simpler to get than a non-conforming loan? Because they're less risky for lenders, since they can sell these loans to Fannie Mae or Freddie Mac. Both of these government-sponsored entities provide stability to the U.S. home lending market, since they guarantee the principal and interest payments made by borrowers.
The Consumer Financial Protection Bureau notes that many of the mortgage loans that got borrowers into trouble during the 2008 housing crisis fell into the non-conforming category.
Aside from the drawback of the borrowing limit, a conforming loan may be tougher to obtain if you have a relatively low credit score or a high debt-to-income ratio. Furthermore, a conforming loan may give you less flexibility in terms of the type of property you can buy. For instance, the borrowing limit for a conforming loan may keep you from buying a home when you need to borrow more money than the limit allows.
How to Apply for a Conforming Loan
An array of lenders offer conforming loans. In fact, more lenders provide conforming loans than non-conforming loans.
As you prepare to apply for a conforming loan, keep in mind that lenders typically will look for a:
- Credit score of at least 620
- Debt-to-income ratio below 50%
- Maximum loan-to-value ratio of 97%, translating into a down payment of at least 3%
To best position yourself for loan approval, check your free credit report and free FICO® Score from Experian to see where your credit stands. It's also important to stop applying for new credit, hold off on big purchases, reduce your credit card debt and make sure you pay every bill on time. All of these steps may help improve your credit score and also your odds for obtaining a conforming loan.