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- Conforming loans conform to Fannie Mae or Freddie Mac guidelines. Non-conforming loans don't.
- Non-conforming loans can be a good option for borrowers who need larger mortgages or other flexibilities.
- The FHFA sets the borrowing limit for conforming loans, which for 2023 is $726,200 in most parts of the US.
When you begin the homebuying process, it can seem like there are an endless number of ways to describe a mortgage. They can be conventional or government-backed, fixed or adjustable, reverse, interest-only — the list goes on and on.
One of the most important mortgage descriptors is conforming vs. non-conforming. In fact, one of the first decisions you'll make when it comes to figuring out the type of mortgage loan you want is whether you're looking for a conforming or non-conforming loan. This will help you determine which mortgage lenders to apply with and what credit requirements you'll need to qualify for a loan.
Conforming loan definition
Conforming loans conform to guidelines set by Fannie Mae or Freddie Mac regarding the types of mortgages they're willing to purchase.
Fannie Mae and Freddie Mac are companies that provide liquidity to the mortgage market by purchasing recently-originated loans from lenders. Then they sell these mortgages to investors as mortgage-backed securities.
Fannie and Freddie don't want to buy mortgages that are too risky, so they'll only purchase mortgages that meet their credit guidelines, such as having a credit score of at least 620 and a debt-to-income ratio of no more than 50%.
Conforming loans also meet the borrowing limits set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. The FHFA sets the limit for conforming loans every year. For 2023, the limit is $726,200 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $1,089,300.
Conforming loans are considered to be a type of conventional mortgage. Conventional mortgages aren't insured or guaranteed by a government agency, such as the Federal Housing Administration, which insures FHA loans.
Differences between conforming and non-conforming loans
Conforming loans meet Fannie Mae's or Freddie Mac's guidelines for purchase. Non-conforming loans, as the name suggests, don't meet these guidelines. This is the key difference between conforming vs. non-conforming loans.
Conforming loans may allow lower down payments than many of the other non-conforming options out there. This is because non-conforming loans are often riskier for lenders, so they require more up front from the borrower. Many non-conforming loans also require higher credit scores for this reason. But it depends on the specific type of loan you're getting.
Conforming loan requirements
- Minimum credit score: 620
- Maximum DTI: 50%
- Minimum down payment: 3%
Keep in mind that individual lenders can have their own guidelines that go beyond what Fannie and Freddie require. For example, a lender can require a minimum credit score of 660 for its mortgages, even though Fannie Mae might purchase a loan with a score of just 620.
Non-conforming loan requirements
There's such a huge variety of non-conforming loans available to borrowers that there isn't a single set of guidelines that covers all non-conforming loans.
There are non-conforming loans that make it possible to qualify if you need to use bank statements instead of tax returns to show your income, or mortgages geared toward borrowers who have experienced recent negative credit events, such as foreclosure. If you have a unique situation that you feel disqualifies you from getting a mortgage, it's worth seeing if there's a non-conforming product out there for you.
One of the most common types of non-conforming loan is a jumbo loan. This is a mortgage that exceeds the FHFA's conforming loan limits. In 2023, this means that a loan that exceeds $726,200 would be considered non-conforming in most parts of the US.
Here are some of the typical requirements you'll see with jumbo loans specifically:
- Minimum credit score: Often at least 700, but it varies by lender
- Maximum DTI: No higher than 45%, and some lenders may ask for a lower DTI
- Minimum down payment: Usually between 10% and 20%
In addition to jumbo loans, other common types of non-conforming loans include interest-only mortgages, ITIN loans, or other types of non-QM loans. The requirements for these loans depends on the particular type of mortgage you're getting and the lender's requirements. But many of them require higher credit scores, low amounts of debt, and large down payments.
Conforming loans vs. other types of mortgages
Many consider government-backed mortgages to be a type of non-conforming loan, since these mortgages conform to different sets of guidelines depending on the agency they're backed by.
There are three main types of government-backed mortgages:
- FHA loans: You'll need a 580 credit score and a 3.5% down payment to get an FHA loan. These mortgages are insured by the Federal Housing Administration.
- VA loans: Guaranteed by the Department of Veterans Affairs, VA loans are available to veterans and military members who meet minimum service requirements. They require no down payment.
- USDA loans: These mortgages allow you to buy a home with no down payment if you have a low-to-moderate income and are buying in a rural or suburban area. They're backed by the US Department of Agriculture.
The pros and cons of conforming loans
Pros
- Less stringent requirements than non-conforming loans. You can generally qualify for a conforming loan more easily than for a non-conforming loan. Jumbo mortgages, for example, often require a better credit score, lower debt-to-income ratio, and higher down payment.
- Lower interest rates. Lenders often charge lower rates on conforming loans than on non-conforming loans.
Cons
- Harder to qualify for compared to government-backed loans. Government-backed loans, especially FHA loans, are often easier to qualify for and have lower minimum credit score requirements.
- 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 non-conforming loan.
- Private mortgage insurance. If you have less than 20% for a down payment on a conforming loan, 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.
- Higher interest rates than for some other mortgages. Most lenders charge lower mortgage rates on FHA, VA, and USDA loans than on conforming loans.
Conforming vs. non-conforming loans FAQs
What is the difference between conforming and non-conforming loans?
The difference that distinguishes a conforming loan from a non-conforming loan is whether the mortgage meets Fannie Mae or Freddie Mac guidelines. A conforming loan meets these guidelines and is eligible for purchase by one of these companies, while non-conforming loans don't and aren't.
What makes a loan non-conforming?
A loan is non-conforming if it's not eligible to be purchased by Fannie Mae or Freddie Mac, meaning it doesn't meet their credit, DTI, or down payment requirements. One of the most common types of non-conforming loan is a jumbo loan.
Which is better, conventional loan or conforming loan?
Conforming loans are a type of conventional loan. If you're considering whether to get a conforming loan or a conventional loan that isn't conforming, which one is better depends on your needs. A non-conforming conventional loan might make sense if you have an unusual situation and need a more flexible mortgage.
What qualifies as a conforming loan?
A conforming loan must meet Fannie Mae or Freddie Mac's credit requirements, which includes a minimum credit score of 620 and a down payment of at least 3%.