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- A conforming loan is a type of conventional loan, or a mortgage not backed by the government.
- The FHFA sets the borrowing limit for conventional loans, which for 2022 is $647,200 in most parts of the US. In 2023, it’s $726,200.
- You’ll need a nonconforming loan to borrow more than the limit set by the FHFA.
What is a conforming loan?
A conforming loan is a type of conventional loan, or a mortgage not backed by a government agency such as the FHA.
A conforming loan meets the borrowing limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year. For 2022, the limit is $647,200 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $970,800. In 2023, the baseline limit is $726,200, up to a ceiling of $1,089,300.
Conforming loans vs nonconforming loans
Both conforming and nonconforming loans are types of conventional mortgages. The differences come down to the amount you borrow and the eligibility requirements.
You’ll get a conforming loan if you need to borrow an amount under the limit set by the FHFA. You’ll need a nonconforming loan, otherwise known as a jumbo mortgage, if you need to borrow more.
For a conforming loan, most lenders require at least a 620 credit score and between a 36% and 50% debt-to-income ratio. You’ll also need a 10% down payment, or just 3% if your conforming loan is backed by government-sponsored mortgage companies Freddie Mac or Fannie Mae.
Eligibility requirements for nonconforming loans are a bit stricter, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming loans, but you’ll likely need a higher credit score, lower DTI, and bigger down payment than you would for a conforming mortgage.
Conforming loans vs other types of mortgages
A conforming loan is a type of conventional loan, but you don’t necessarily need to get a conventional mortgage. Instead, you may opt for a government-backed mortgage.
Each type of government loan has its own eligibility requirements. There are three main types of government-backed mortgages:
- FHA loans: You can get a mortgage with a lower credit score and higher DTI than with a conforming loan, and you’ll need a 3.5% down payment.
- VA loans: Military families can get VA loans with no down payment.
- USDA loans: You can buy a home with no down payment if you have a low-to-moderate income and are buying in a rural or suburban area.
You may find that one of these types of mortgages is a better fit than a conventional mortgage, even if you’re borrowing an amount that qualifies you for a conforming loan.
The pros and cons of conforming loans
Before applying for a conforming loan, consider its advantages and disadvantages versus a nonconforming loan, and versus government-backed loans.
Pros
- Less stringent requirements than nonconforming loans. You can qualify for a conforming loan more easily than for a nonconforming loan. A jumbo mortgage often requires a better credit score, lower debt-to-income ratio, and higher down payment.
- Lower interest rates than for some mortgages. Lenders usually charge lower rates on conforming loans than on nonconforming loans.
Cons
- Stricter requirements than for some loans. With government-backed mortgages, you may qualify for a loan with a lower credit score, higher DTI, and/or a lower down payment than you would with a conforming loan. The exact requirements will depend on which type of government loan and which lender you choose.
- Borrowing limit. You can only borrow a certain amount with a conforming loan. If you need more than the FHFA allows, you’ll want to go with a nonconforming loan.
- Private mortgage insurance. If you have less than 20% for a down payment, you’ll have to pay for PMI until you gain more equity in your home. PMI typically costs between 0.2% and 2% of your mortgage amount. Although you have to pay for mortgage insurance and other fees with government-backed loans, you won’t have to pay for PMI. Avoiding PMI could save you money over time.
- Higher interest rates than for some other mortgages. Most lenders charge lower mortgage rates on FHA, VA, and USDA loans than on conforming loans.
