Conforming Loans: What They Are and How They Work

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Conforming loans are mortgages that meet the requirements to be purchased by Fannie Mae or Freddie Mac. These loans are the most common type of home loan, and you’ll find that most lenders offer them.

Back in the early 1970s, the conforming loan limit was just $33,000. Now, half a century later, the limit is $548,250.

Here’s what you should to know about conforming loans:

• What is a conforming loan?
• Conforming loans vs. conventional loans
• Conforming loans vs. non-conforming loans
• Requirements to qualify for a conforming loan
• Conforming loan limits for 2021
• Is a conforming loan right for you?

What is a conforming loan?

A conforming loan meets Fannie Mae and Freddie Mac’s requirements for residential mortgages. Borrowers must have a:

• Down payment of at least 3%
• Debt-to-income (DTI) ratio no higher than 45%
• Credit score of at least 620

Keep in mind: These are only minimums. To qualify for a loan, lenders will generally expect you to be stronger in one area to offset any weaker ones. For example, in order to secure a Fannie Mae-backed conforming conventional mortgage with a down payment of 3%, you might need a credit score of at least 680 and a DTI no higher than 36%.

In most parts of the country, borrowers also must be looking to borrow no more than $548,250 for a single-family home.

The Federal Housing Finance Agency (FHFA) sets the loan limits for conforming loans each year based on housing prices. Fannie and Freddie can’t buy home loans that exceed these limits.

Conforming loans vs. conventional loans

Conforming loans are frequently confused with conventional loans, but the two terms aren’t interchangeable:

• A conventional loan is any mortgage that doesn’t provide a government guarantee to compensate the lender if the borrower defaults. In 2019, lenders issued more than 13 million conventional loans.
• A conforming loan is a type of conventional loan.

Read More: 5 Types of Mortgage Loans: Which One Is for You?

Conforming loans vs. non-conforming loans

Conventional loans that don’t fall within the loan limits set by the FHFA are referred to as “non-conforming.” These high-value conventional loans are commonly called jumbo loans and they accounted for less than 5% of purchase mortgages in 2019.

A jumbo loan is a particular type of non-conforming loan. Conventional loans that don’t meet Fannie Mae and Freddie Mac’s other guidelines are considered non-conforming.

Requirements to qualify for a conforming loan

Remember: If you’re at or near one of the above limits, you’ll generally have to be stronger in other areas to compensate. Plus, lenders can set their own criteria that are stricter than Fannie and Freddie’s. To improve your chances of qualifying for a loan, focus on boosting your credit score and making as large of a down payment as possible.

Find Out: How to Get the Best Mortgage Rates

Conforming loan limits for 2021

The conforming loan limit for 2021 is $548,250 for a single-family home in most areas. However, you may be able to borrow as much as $822,375 in areas with high home values, such as Hawaii and parts of California and New York.

The FHFA reevaluates the conforming loan limit every year to keep it in line with national average home prices. For example, from 2019 to 2020, the limit increased by about 5% to reflect year-over-year changes in a seasonally-adjusted housing price index.

Check Out: How to Buy a House: Step-by-Step Guide

Is a conforming loan right for you?

Conforming loans have several advantages:

• They offer low interest rates to borrowers with good credit. Freddie Mac’s Primary Mortgage Market Survey for November 12, 2020, shows an average interest rate of 2.84% on a 30-year, fixed-rate mortgage with 0.7 points and 20% down.
• They’re widely available and easy to shop for. Most lenders offer conforming loans, with the exception of some lenders that specialize in government-backed loans, jumbo loans, or portfolio loans. Since they’re widely available, qualified borrowers will have an easy time comparing offers from different lenders to get a good deal.
• Their standardized requirements make them easy to understand. No matter which lender you get a conforming loan from, the basic requirements will be the same — though, as we mentioned earlier, some lenders might impose stricter requirements, like a higher minimum credit score.

Conforming loans can be a great choice for aspiring homebuyers with good credit who are looking for moderate-value homes. If you’re shopping for a home loan, you can use Credible to compare prequalified rates on conforming loans. It’s simple, free, and only takes a few minutes.

About the author

Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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