A conforming loan or a conforming mortgage is a type of conventional mortgage that meets the loan standards set by the Federal Housing Finance Agency (FHFA). Loans that adhere to the criteria set by the FHFA are eligible to be purchased by government-sponsored enterprises (GSEs), like Freddie Mac and Fannie Mae. Mortgage lenders also often offer conforming mortgages at a lower interest rate because they are safe and present relatively low financial risk.
Keep reading to discover if a conforming mortgage loan might be right for you. With this article, you’ll learn the benefits of conforming home loans, the difference between conforming and non-conforming loans, and the loan limits the FHFA has set for 2024.
Conforming Home Loan Limits
Conforming home loans must comply with several guidelines set by the FHFA. The FHFA requires all conforming home loans to meet the following criteria:
- Individual loans must not exceed $766,550 in most areas and $1,149,825 in high-cost areas
- Borrowers must possess a minimum credit score of 620
- Borrowers must possess a debt-to-income ratio of 36% or less (50% or less under some circumstances)
- Conforming loans require a minimum down payment of at least 3% for new home financing and 5% for refinances
- Borrowers that submit a down payment of less than 20% must carry Private Mortgage Insurance (PMI) and will have a higher mortgage payment
- The loan-to-value ratio on a conforming mortgage cannot be higher than 97%
How a Conforming Mortgage Loan Works
After a homebuyer takes out a conforming loan with a lender, the lender can either keep the loan in their portfolio or sell the loan to a GSE (likely Freddie Mac or Fannie Mae). Selling conforming loans to GSEs bolsters the market by taking debt off private lenders' books so that they can issue more loans and remain more resilient during downswings in the economy.
The Most Common Types of Home Loans
Conventional loans, which include conforming and nonconforming loans (more on this later), are the most popular type of home loan offered by mortgage lenders. However, conventional loans are not the only type of mortgage available to homebuyers, and you may be better off choosing a different loan option for several reasons, including if the price of the house will lead to a loan that exceeds FHFA limits.
Other common types of home loans include:
- FHA loans are government loans backed by the Federal Housing Administration. Because they’re insured by the government, FHA loans represent less risk for lenders, allowing lenders to tolerate lower minimum credit scores—making it easier to for borrowers to qualify.
- VA loans: are backed by the U.S. Department of Veterans Affairs—eligible to active military servicemembers, military spouses and veterans. VA loans come with the benefit for no-money-down financing and no mortgage insurance premiums. Credit score and debt-to-income requirements might also be lower compared to conventional loans.
- USDA loans are another government-backed loan type, offered through the U.S. Department of Agriculture. Like VA loans, they offer no-money-down financing. They might also allow eligible borrowers to qualify for a lower interest rate.
- Jumbo loans are large conventional loans that exceed the conforming loan limits set by the FHFA. Because they’re non-conforming, jumbo loans may have a higher interest rate.
Conforming Loans vs. Non-conforming Loans
The main difference between conforming and non-conforming loans is that conforming mortgages meet FHFA guidelines while non-conforming mortgages do not. Also, Fannie Mae and Freddie Mac are not eligible to purchase non-conforming mortgages.
Additional discrepancies between conforming and non-conforming loans include:
- Conforming mortgages are typically less expensive than non-conforming mortgages
- Conforming loans are more widely available than non-conforming loans
- Conforming loans must comply with the monetary limits set by the FHFA
What are the Advantages of a Conforming Mortgage Loan?
The advantages of conforming home loans include the following:
- Lower Interest Rates: Mortgage lenders typically offer conforming mortgage loans at lower interest rates because they are low-risk and a relatively safe investment.
- Availability: Conforming loans are more widely available than other loan types, including non-conforming loans and government-backed loans.
- Lower Down Payment: Conforming mortgages only require a down payment of at least 3%, which is significantly lower than jumbo loans and adjustable-rate mortgages (~10%).
- Avoid Private Mortgage Insurance: Homebuyers who submit a down payment of at least 20% can avoid purchasing private mortgage insurance.
What are the Disadvantages of a Conforming Mortgage Loan?
Even though conforming loans are popular, they can also have their drawbacks. The disadvantages of conforming loans include the following:
- Borrowing Limits
- Low Debt-To-Income Ratio
- High Minimum Credit Score
The biggest drawback of conforming loans is that they are monetarily limited. As of 2024, the borrowing limit for conforming mortgages is $766,550 in most areas. Conforming loans also require homebuyers to possess a debt-to-income ratio of 36% or less and a minimum credit score of 620.
When comparing conforming loans to other loan types, government-backed loans generally require buyers to possess a lower credit score and have more lenient restrictions regarding a borrower’s debt-to-income ratio.
Summary of Conforming Home Loans
In summary, conforming mortgages are a type of conventional loan that meets the standards set forth by the FHFA and are eligible to be purchased by Freddie Mac and Fannie Mae. Conforming loans carry borrowing limits, credit score restrictions, debt-to-income constraints, and loan-to-value conditions. They’re often more attractive to borrowers with good credit, due to their wide availability, the possibility of qualifying for a lower interest rate, and having mortgage insurance premiums removed once the loan-to-value (LTV) ratio falls below 80%.
If you’re in the process of buying a home, choosing the right loan type is vital. Partnering with a trusted lender, like our in-house affiliate Inspire Home Loans, is the best way to learn about your specific loan options and choose the perfect loan for your home-buying experience.
Conforming Mortgage Loans FAQ
What is the conforming loan limit for 2024?
The baseline conforming loan limit for 2024 is $766,550 in most areas. The FHFA sets higher limits for conforming loans in high-cost areas. The 2024 conforming loan limit for high-cost areas is $1,149,825 (one-unit properties).
What is a government-sponsored enterprise (GSE)?
Government-sponsored enterprises are organizations created by Congress to improve different areas of the U.S. economy. Freddie Mac and Fannie Mae are two GSEs that work alongside government agencies to elevate the housing market.
What agency regulates conforming mortgage loans?
The Federal Housing Finance Agency (FHFA) regulates conforming loans. Every year, the FHFA sets conforming loan limits and regulates what loans Freddie Mac, Fannie Mae and other GSEs can purchase.
What is an example of a non-conforming loan?
A non-conforming loan is any type of loan that doesn’t meet the conforming mortgage criteria set by the FHFA. Common examples of non-conforming loans include government-backed loans and jumbo loans.
What is the difference between a conforming loan and a conventional mortgage?
While lenders occasionally refer to conforming home loans as conventional loans or conventional conforming loans, these terms are somewhat misleading. Conforming loans are a type of conventional mortgage, but not all conventional mortgages conform to FHFA standards.