Conforming loans are mortgages that—as their name implies—conform to the conforming loan limit (CLL) set by the Federal Housing Finance Agency (FHFA). The CLL for a single-family home in 2024 is $766,550—or up to $1,149,825 in designated high-cost areas. Conforming loans must also meet the purchase criteria of Fannie Mae and Freddie Mac, which include guidelines about borrowers’ minimum credit score and debt-to-income (DTI) ratio. Conforming loans are also referred to as conventional loans.
While all this might sound like a lot of alphabet soup, conforming loans are simply loans that follow the requirements set by these organizations, and they’re among the most common mortgages. For qualifying borrowers, conforming loans generally offer favorable terms and relatively low upfront costs—and, because they’re less risky for lenders (more on that in just a moment), they tend to be more readily available than some types of non-conforming loans.
Still, conforming loans aren’t the only type of mortgage on the market. Some types of nonconforming loans may, depending on your circumstances, be even more affordable and favorable for your needs. Below, we’ll dive into the details—and available alternatives.
When you take out a mortgage, you might think that the lender simply pays for the property upfront and then receives your repayment (plus interest) over the next 15 or 30 years—case closed.
But in reality, many lenders sell loans—as long as they conform to the above-mentioned guidelines—to Fannie Mae and Freddie Mac, federally funded enterprises that guarantee lenders remuneration on the loans. That remuneration is usually offered in the form of mortgage-backed securities (MBS), on which Fannie Mae or Freddie Mac pays principal and interest.
Such a guarantee comes at a cost to lenders, though. This expense is known as a guarantee fee (g-fee), the cost of which is usually passed down to the original borrower (that’s you) in the form of a slightly higher interest rate.
Even so, because conforming loans carry a relatively low-risk level for lenders—they’re already guaranteed repayment even if you default—their overall costs tend to be lower than they are for some types of non-conforming loans, like jumbo loans. One big plus for borrowers on a budget: You may only need to come up with a 3% minimum down payment.
An exception to this rule: government-backed loans like FHA, USDA, and VA loans, which are directly insured by the U.S. government, and thus, also a low risk for the lender. (Government-backed loans do, however, tend to carry more stringent and specific eligibility requirements, such as first-time homebuyer or veteran status.)
Like any financial product—or life decision, for that matter—there are both benefits and drawbacks to consider when it comes to conforming mortgage loans.
Pros:
- Conforming loans carry a relatively low minimum down payment of as little as 3%, whereas some types of non-conforming loans, such as jumbo loans, require at least 10%, —and sometimes as much as 30%.
- Because of their relatively low risk to lenders, conforming loans tend to be readily available from a wide variety of financial institutions.
- Although borrower guidelines apply, the requirements are on the more lenient side compared to some types of loans; your credit score can be as low as 620, for example.
Cons:
- While conforming loans are easier to qualify for than jumbo loans, government-backed loans—FHA, VA, and USDA loans—often carry even lower minimum credit score requirements if you meet the other eligibility criteria (for example, being a first-time homebuyer, veteran, or buying in a rural area).
- Conforming loans, by definition, are only available up to a certain dollar limit—so if your heart is set on a super high-end home, a conforming loan might not work for you.
- While you can get a conforming loan with a 3% minimum down payment, if you put down less than 20%, you’ll most likely need to pay private mortgage insurance (PMI), which can ratchet up your monthly payment.
So what, specifically, are the limits and rules to qualify a mortgage (and borrower) for a conforming loan? While these are given to change from time to time, in 2024, the conforming loan limits and guidelines are as follows:
- For a single-family home in most of the United States, conforming loans cannot exceed $766,550.
- In Alaska, Guam, the U.S. Virgin Islands, and certain other high-cost areas, the limit is raised to $1,149,825.
- Borrowers must have a credit score of at least 620.
- Borrowers’ debt-to-income ratio (DTI) must usually be 36% or less, though in some instances can be as high as 50%.
The CLL is higher for those purchasing multiple-unit properties such as duplexes, and individual lenders may have their own borrower eligibility criteria that could be stricter than the conforming loan limits. The best way to determine if you’re eligible for a conforming loan is to talk to a loan officer or get pre-qualified, a process that usually doesn’t involve a hard credit inquiry (and is thus unlikely to affect your credit score).
While conforming loans are both common and, for many borrowers, a smart choice, there are other options out there that might be worth considering if you’re eligible.
Conforming vs. nonconforming loans
If conforming loans are those that conform to the guidelines mentioned above, nonconforming loans are those that—well, don’t. That could be because the loan amount is higher than the CLL (which is the case in a jumbo loan) or because borrowers aren’t held to the Freddie Mac/Fannie Mae eligibility standards.
Some banks offer non-traditional, non-conforming mortgages expressly aimed at borrowers who may have trouble qualifying for a conventional loan, such as self-employed people, foreign nationals, and investors. These loans often have higher down payment minimums and credit score requirements, though.
However, there are important nonconforming loans that can help would-be homeowners get their foot in the door—literally—with easier qualification standards (assuming they’re eligible). These government-backed loans are designed to help people buy homes, and if you fit one of their designated demographics, these nonconforming loans are worth considering.
- Federal Housing Authority (FHA) loans are specifically designed for first-time homebuyers. They allow down payments as low as 3.5% with a credit score as low as 580, and even those with scores as low as 500 may qualify with a higher down payment. FHA loans may also carry lower closing costs than some conventional loans, but you’ll need to be purchasing your first home to qualify.
- U.S. Department of Veterans Affairs (VA) loans are for veterans, service members, and eligible surviving spouses. They don’t have a specific minimum credit score requirement or specified minimum down payment, though some lenders may have down payment minimums.
- U.S. Department of Agriculture (USDA) loans incentivize the purchase of homes in designated rural areas. Low- and moderate-income households can receive assistance, if approved, with no required down payment. Of course, such a loan substantially limits where you can look for your new home.
Conforming vs. conventional loans: What’s the difference?
Trick question—because these two terms refer to the same thing! Conventional loans and conforming loans are the same kind of mortgage, so if you see a bank advertising either term, a conforming loan is what you’d be applying for.
While all conforming loans have the same basic requirements, they’re not identical. Here are some tips for shopping the mortgage market if you’re getting ready to buy a home.
- Make sure a conforming loan is the best option. As discussed above, conforming loans can be a great option for many borrowers—but they’re not the only option, and in some cases, they’re not the best. First-time homebuyers usually benefit from at least considering an FHA loan. Although the required minimum down payment is slightly higher (3.5% compared to 3%), credit score requirements are lower—and closing costs may be, too.
- Shop around. Although the absolute limits are defined by the FHFA, Fannie Mae, and Freddie Mac, different banks may have their own borrower qualification policies. You may be able to find a bank that accepts a higher DTI ratio, for example, or offers a lower interest rate—which could save you thousands of dollars over the long run.
Conforming/conventional loans are a common choice for homebuyers who need to borrow funds in order to make a purchase, but they’re not the only option. Government-backed loans, though technically non-conforming, are well worth looking into for many low-income or first-time homebuyers.
Frequently asked questions (FAQs)
What is the difference between conforming and non-conforming loans?
Conforming loans are those that conform to the regulations set out by the FHFA, as well as Fannie Mae and Freddie Mac. These guidelines include a dollar limit on the loan itself (which, in 2024, is $766,550 for most single-family homes, but changes yearly) as well as the financial standing of borrowers (who must have a credit score of at least 620 and a reasonable DTI ratio). Non-conforming loans, on the other hand, do not conform to these standards. Non-conforming loans include jumbo loans, FHA loans, VA loans, and USDA loans.
Is a conforming loan an FHA loan?
No, an FHA loan is a government-backed loan that is specifically designed for first-time homebuyers. A conforming loan, or conventional loan, is not government-backed (though many lenders sell these loans to Fannie Mae or Freddie Mac in exchange for mortgage-backed securities). Conforming loans are available to qualifying borrowers regardless of how many times they’ve purchased a home, while FHA loans are for first-time buyers only.
What are the pros of conforming loans?
Because they carry a relatively low risk for lenders, conforming loans are available at relatively low up-front costs; qualified borrowers can put down as little as 3%. [Note that in so doing, they will be on the hook for private mortgage insurance(PMI) until they achieve at least 20% equity in the home.] Additionally, conforming loans are widely available from many different lenders, and the application and approval process is usually fairly straightforward.
