What Is A Conforming Loan, And Is It Right For You?

Home buyers have plenty of options when considering the best type of mortgage loan for their home purchase. A conforming loan, one of the most common types of home loans, is typically considered to be the standard loan for buyers who have good credit and cash for a sizable down payment. Additionally, these buyers aren't searching for a high-value home that surpasses the conforming loan limits in a particular area.

Let’s take a closer look at what conforming loans are, their requirements and the process of applying for one. 

What Is A Conforming Loan?

A subset of conventional loans – which we’ll delve into in a minute – conforming loans are loans that “conform” to or satisfy the funding requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Created by Congress to help ensure an affordable, reliable supply of mortgage funds throughout the U.S., Fannie and Freddie are government-sponsored entities (GSEs) that purchase conforming loans from private mortgage companies for the purpose of holding the loans in their portfolios or converting them into mortgage-backed securities. This creates a secondary market for mortgages that allows lenders to continue to lend to home buyers.

Thanks to their liquidity – a fancy word for the ease by which they can be turned into ready cash without affecting their market price – conforming loans often have reasonable interest rates (although they’re still usually higher than non-conforming, government-backed loans). Conforming loans tend to have interest rates that are fairly comparable to the rates of non-conforming jumbo loans, another subset of conventional loans but one with loan amounts too large to be acquired by Fannie or Freddie.

Conforming Loans Vs. Conventional Loans

The terms conforming loan and conventional loan are sometimes used interchangeably, but buyers should be aware of an important distinction between the two. Conventional mortgages are by definition loans that aren’t backed by a government agency such as the Federal Housing Administration (FHA), USDA (U.S. Department of Agriculture) or Department of Veterans Affairs (VA).

Often, conventional loans do meet the criteria set by Fannie Mae and Freddie Mac, making them also fall into the category of conforming loans, but this isn’t always the case. So, while all conforming loans are conventional loans, conventional loans can be non-conforming. The best example of a conventional loan that isn’t a conforming loan is the aforementioned jumbo loan, which is a loan that eclipses the limits put in place by the Federal Housing Finance Agency.

The FHFA sets the rules for the types of mortgages that Fannie and Freddie can buy. A loan is considered non-conforming if it fails to meet a requirement set by the FHFA or is too large to be classified as a conforming loan based on FHFA standards.

How Do Conforming Loans Work?

Still a little confused about how conforming loans work? Let’s take a look at what happens to a conforming mortgage once you close on your home.

• After your home closing, your loan documents are verified for accuracy and completion and then sent to Fannie Mae and Freddie Mac to purchase.

• Fannie Mae or Freddie Mac examines the loan paperwork, adds the loan to their system and pays off the original lender.

• Your loan is bundled with other similar mortgages and is securitized to be sold to investors.

• Investors purchase mortgage-backed securities and earn interest on your mortgage payments.

Conforming Loan Requirements

Conforming loans are typically more difficult for buyers to qualify for than non-conforming, government-backed loans, because they have stricter lending requirements that the borrower must meet. Keep in mind that each lender may have certain requirements for borrowers to meet, so simply satisfying the criteria below doesn’t guarantee your loan will be approved.

Let’s take a closer look at the standard minimum requirements of a conforming loan.

Conforming Loan Limits

Conforming loans can’t exceed a certain dollar amount formally known as the conforming loan limit. Each year, the FHFA sets the conforming loan limit. For 2024, the conforming loan limit for single-unit properties is $766,550 throughout most of the U.S. Areas with more expensive housing prices have a higher maximum loan limit of up to $1,149,825 for one-unit properties.

For help finding the conforming loan limit in your area, try this interactive conforming loan limit map from the FHFA. 

Down Payment

Home buyers looking to take out a conventional loan will need to have the ability to make a down payment of at least 3%. Buyers who can put down more may want to do so, however. To avoid private mortgage insurance, a down payment of 20% is usually required.

Credit Score

Conventional loan lenders typically want to see a minimum credit score of 620. A good credit score is indicative of your ability to pay back the money you borrowed, and lenders seek to minimize their risk by ensuring they’re lending to responsible borrowers. A high credit score may also help you secure a lower mortgage interest rate.

Debt-To-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your gross monthly gross income that you devote to paying off debts such as auto or student loans, credit cards, the mortgage or rent, and child support. For a conforming loan, lenders prefer to see a DTI ratio of no higher than 36%, but it’s possible in some cases to qualify for a conventional loan with a DTI of up to 50%.

Loan-To-Value Ratio

Another important number to know when applying for a conforming loan is your loan-to-value (LTV) ratio, which is the amount of your loan compared to the appraised value of the property. Buyers using a conforming loan to purchase a house usually need an LTV ratio of 97% or lower.

Pros And Cons Of A Conforming Mortgage

As with all kinds of mortgages, conforming mortgages have their pros and cons. If you’re on the fence about whether a conforming loan is right for you, consider the advantages and disadvantages detailed next.

Conforming Loan Pros

Conforming loans can be beneficial for both lenders and borrowers. Lenders tend to like conforming loans because they offer less risk than non-conforming loans, whether they be jumbo loans or government-insured loans like FHA, USDA or VA loans. And by ensuring their loans conform to Fannie Mae and Freddie Mac’s standards, lenders know they’ll be able to sell these mortgages and use the cash return to continue underwriting mortgages down the road.

For buyers, conforming loans often offer fewer fees than what’s typical of other home loans. For example, conforming loans don’t require funding fees like VA loans. And if a buyer puts down 20% on a conforming loan, they can avoid paying private mortgage insurance – unlike government-sponsored FHA loans where mortgage insurance (MIP) is required regardless of the down payment amount. And since so many lenders offer conforming loans, buyers have the ability to shop around and find a lender that will give them the best rate and terms.

Of course, the exact rate you’ll get on your mortgage depends on numerous factors, but generally speaking, if you have good credit and a significant down payment, a conforming loan will have the most favorable terms.

Conforming Loan Cons

The biggest downside of conforming loans is that they can be more difficult to get than non-conforming, government-backed loans. This is because they generally have stricter credit, down payment and DTI requirements that borrowers must meet.

These loans come with a down payment of at least 3% – less than the minimum down payment of 3.5% for FHA loans but more than the minimum for USDA and VA loans, which usually require zero down – and saving for a down payment is often a barrier to homeownership for many people.

The Bottom Line On Conforming Loans

Conforming loans are popular among home buyers because they typically offer minimal fees compared to other types of mortgages. However, conforming loans have more stringent requirements than non-conforming government-insured loans. It’s critical to carefully consider the types of home loans you qualify for in order to make the right decision for your situation. Still, if you have the cash for a robust down payment and reasonably good credit, a conforming loan could be a good place to start.

If you’re interested in using a conforming loan to purchase a home, the Home Loan Experts at Rocket Mortgage^® can help. Get your initial approval online today.