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Conforming and nonconforming loans: What’s the difference?

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Conforming loan? Nonconforming loan? You might be baffled by these bits of mortgage jargon. Both can help you purchase the property you’re interested in, but there are important differences between the two, and if you’re in the market to secure a mortgage, it’s critical to have a solid grasp on them before you make a choice.

What is a conforming loan?

A conforming loan is one that meets the guidelines set by government-backed agencies such as Fannie Mae and Freddie Mac. There are a number of criteria that must be met to qualify for a conforming loan, including the amount you’re borrowing.

Conforming loan requirements

For 2022, the ceiling for a single-family, conforming home loan is $647,200 in most parts of the continental U.S. In Hawaii and Alaska, and in certain high-cost counties where median home prices are significantly higher than average, the conforming loan limit goes up to $970,800. You can find state-by-state loan limits here.

There are other criteria that a conforming loan must meet, as well. They include specifications about the size of the down payment relative to the loan, the borrower’s debt-to-income (DTI) ratio, the type of property and the borrower’s credit score and history.

Typically, conforming loans require a minimum credit score of 630­ to 650 (although getting the best rate requires a score of 740 or higher), a minimum down payment of 3 percent and a DTI ratio no higher than 41 percent.

Conforming loan pros

  • Costs less: Because there is a larger secondary market for conforming loans, they often have lower interest rates than nonconforming loans — and that means lower monthly payments and less money spent over the life of the loan. Conforming loans also typically have lower down payment requirements.
  • Fewer surprises in underwriting: The underwriting and approval process for conforming loans is highly standardized, so you’re unlikely to encounter unusual lender requirements that could bog you down.
  • Some protections: Because they’re backed by Fannie and Freddie, conforming loans could come with certain protections in times of crisis, such as the foreclosure moratorium that the federal government enacted during the pandemic.

Conforming loan cons

  • Less accessible: Conforming loans can be difficult to obtain for borrowers with lower incomes and credit scores and higher DTI ratios.
  • Not always sufficient: A conforming loan might not offer you enough funds if you’re looking to purchase a home in an expensive area, even with the higher loan limit in those places. For example, as of March 2022, the median home sales price in Marin County, California, was $1.3 million, according to realtor.com. However, the conforming loan limit for a single-family home in the county is $970,800.

What is a nonconforming loan?

Mortgage loans that don’t meet the requirements for a conforming loan are considered to be nonconforming loans. “Jumbo loans” are nonconforming loans that exceed the maximum loan limit for an area — but loans can be nonconforming for other reasons beyond loan size. For example, many loans for commercial properties are nonconforming.

Compared to conforming loans, there is a much wider diversity of loan types and features among nonconforming loans. It’s important to remember that nonconforming mortgages often come with higher interest rates than conforming loans, although this is not always the case. The process of securing a nonconforming loan may also be quicker and require less documentation.

Nonconforming loan requirements

Particularly in the case of jumbo loans, lenders may expect to see borrowers with higher down payments, higher credit scores, high cash reserves and/or lower DTI ratios in order to justify the size of the loan. You can expect to put down a down payment of at least 20 percent if you’re planning to rely on a nonconforming loan. You can research jumbo loan rates here.

Nonconforming loans may also be available to borrowers who have gone through a bankruptcy in the recent past, which may disqualify them from a conforming loan.

Here are three common reasons borrowers don’t qualify for conforming loans:

  • Loan size: If you’re borrowing more than $647,200 in much of the U.S., or more than $970,800 in high-cost areas such as Hawaii, you’ll need a nonconforming loan. Less than that and a conforming loan will do.
  • Credit score: If you’ve experienced credit troubles and your FICO score is south of 630, you probably won’t qualify for a conforming loan. For borrowers with low credit scores, mortgages issued by the Federal Housing Administration are a popular alternative. FHA loans allow for down payments as low as 3.5 percent. One downside: Steep fees for mortgage insurance make FHA loans costlier than conforming loans.
  • A high DTI ratio: If your debts push you out of Fannie and Freddie territory, you still might be able to get an FHA mortgage or a type of nonconforming loan known as a non-QM mortgage.

Nonconforming loan pros

  • Expands your options: A nonconforming loan can widen your housing options by allowing you to buy in a more expensive area, or a type of home that isn’t eligible for a conforming loan.
  • Potentially available to more borrowers: Some mortgage lenders provide nonconforming loan solutions for borrowers with credit issues, including bankruptcy, making it a more accessible option than a conforming loan.

Nonconforming loan cons

  • More expensive: Since nonconforming loans pose a greater risk, the lender will compensate with more stringent and more expensive requirements, including higher interest rates and down payment and reserve requirements.

Conforming loan vs. nonconforming loan: Which is best for you?

If the price of your desired home is within conforming loan limits and your credit history meets eligibility requirements, you’re better off seeking a conforming loan, which generally has a lower rate and lower down payment requirement compared to a nonconforming loan.

A nonconforming loan is best reserved if you’re looking to buy a more expensive property and need a higher loan amount, or potentially if you have a negative marks on your credit history. However, that flexibility comes with downsides, including a higher interest rate.

Shopping for a nonconforming loan

If you’ve decided that a nonconforming loan is the right choice for your situation, do your homework before selecting mortgage  lender. Compare interest rates and loan terms among several different lenders to ensure you find the best option.

You can contact your bank and other lenders directly to ask them about the types of nonconforming loans they offer. Another avenue worth exploring: Find a mortgage broker who specializes in nonconforming loans. A good broker knows what’s available and can save you time and money.

Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
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Reviewed by
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