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Conforming Loans: Everything You Need To Know

Lauren Nowacki4-minute read

April 06, 2021

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As you review home financing options, you may realize there are several different types of mortgage loans out there, each with unique terms, interest rates, qualification requirements and guidelines. One type of loan available to borrowers is a conforming loan. A popular option for home buyers, conforming loans follow a certain set of rules that make them favorable with lenders. But if you’re a home buyer in need of financing to help pay for a much more expensive home, a conforming loan may not be for you. Read on to learn more about this type of loan and why you should or shouldn’t use one to purchase a home. 

What Is A Conforming Loan?

A conforming loan is a conventional loan that abides by (or conforms to) certain guidelines set by Freddie Mac and Fannie Mae, the two largest, government-backed entities that purchase mortgage loans. Such guidelines include loan qualification criteria and the maximum loan amount Fannie Mae and Freddie Mac can legally purchase the loan for, also known as the conforming loan limit.

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Conforming Loan Limits: How They Work

For a conventional loan to be considered a conforming loan, the loan amount must fall below the conforming loan limit. This limit is set by the Federal Housing Finance Agency (FHFA) and is the maximum amount you can borrow on a conforming loan. Fannie Mae and Freddie Mac cannot legally purchase a loan that’s more than the conforming limit.

Each year, the FHFA sets new loan limits, which are designated by county. In 2021, the conforming loan limit for most of the U.S. is $548,250. There are some areas that have a higher loan limit because they’re considered high-cost areas. Examples of these include Hawaii, Alaska, Guam and the U.S. Virgin Islands, where the conforming loan limit is $822,375. In high-cost counties within the contiguous U.S., the loan limits fall between $548,250 and $822,375, depending on the county. If you want to purchase a home that is higher than your area’s loan limits, you’ll need to get a nonconforming loan instead.

The loan limit is one of the most distinguishable differences between conforming loans and non-conforming loans.

Conforming Loans Vs. Nonconforming Loans

Any conventional loan that doesn’t follow the guidelines to be purchased by Fannie Mae or Freddie Mac is considered a nonconforming loan. These guidelines can be the conforming loan limits or the qualifications needed to get a loan.

There are several ways conforming guidelines could restrict a home buyer’s ability to get a conforming loan, which is why it’s important to have nonconforming loans, too.

One way conforming loans can restrict home buyers is by putting a limit on how much they can borrow. If a home buyer needs to borrow more money than the conforming loan limit allows, they would need to get a type of nonconforming loan called a jumbo loan. A jumbo loan exceeds the conforming loan limits, which can make them riskier. Because of this, there may be stricter criteria for qualifying, including higher down payment and credit score requirements and lower debt-to-income ratio requirements. Jumbo loans may also have higher interest rates.

Needing to borrow a higher amount of money isn’t the only reason someone may choose a non-conforming loan. FHA loans are another type of nonconforming loan that are not conventional loans. These loans have limits, but may be easier to qualify for than some conforming loans. FHA loans are backed by the government, making them less risky for lenders. Because of this, they have lower credit score and down payment requirements.

Pros And Cons Of Conforming Loans

When choosing the right loan option for you, it’s important to weigh the pros and cons. Consider these when choosing whether or not to get a conforming loan.

Pros

Because conforming loans can be purchased by Fannie Mae and Freddie Mac, these types of conforming loans are offered by many lenders. This allows you to shop around for the best rates. And since they may be less risky than some nonconforming loans, conforming loans may also offer lower interest rates. Compared to jumbo loans, a type of non-conforming loan, a conforming loan may also have lower down payment and credit score requirements.

Cons

One of the biggest drawbacks of a conforming loan is that it restricts how much you can borrow. And, compared to FHA loans, conforming loans could be harder to obtain for borrowers burdened by debt or poor credit scores.

How To Apply For A Conforming Loan

As with any loan, there are a few qualifying factors interested borrowers must fulfill in order to get approved for a conforming loan. Typically, you’ll need a credit score of at least 620 and a debt-to-income ratio below 50%. You’ll also need to put down at least 3%. Of course, you’ll also want to make sure you don’t need to borrow past the conforming loan limit, which is $548,250 in most areas and $822,375 in high-cost areas.

Because conforming loans are likely guaranteed to sell to Fannie Mae and Freddie Mac, most traditional lenders will offer these types of loans. Since they’re popular loans, make sure you shop around to find the best rates.

As with any other type of loan, you’ll need to have a government-issued ID, up to 2 years’ worth of W-2s, at least 2 months of bank statements and enough money to cover your down payment and closing costs. Keep in mind, closing costs are typically a percentage of your total home value (typically 3% – 6%), so the higher the home value, the more you’ll pay in closing costs. That means you’ll likely pay more in closing costs with a jumbo loan.

The Bottom Line

Conforming loans follow certain guidelines set by Fannie Mae and Freddie Mac, so they can be purchased by these two enterprises. While these guidelines, which include conforming loan limits, can sometimes burden certain home buyers, conforming loans are often the best option for the average buyer. Depending on your goals and your financial situation, a conforming loan could be a good option for you. If you still have questions, contact Rocket Mortgage®for expert advice and assistance with your loan.

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Lauren Nowacki

Lauren Nowacki is a staff writer specializing in personal finance, homeownership and the mortgage industry. She has a B.A. in Communications and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.