Conforming and nonconforming loans: What’s the difference?


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Conforming loan? Nonconforming loan? You may have heard of these loan types before, and if you’re in the market to secure a mortgage, you need to know the difference.

Both kinds of loan can help enable you to purchase the property you’re interested in. But there are also important differences between these two categories of loans, and it’s critical to have a solid grasp on the distinctions between them before you make a choice.

Conforming Loans: An Overview

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 for a conforming loan. For 2018, the ceiling for a single-family, conforming home loan was $453,100 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 is $679,650.

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 ratio, the type of property and the borrower’s credit score and history. Typically, conforming loans require a minimum credit score of 630­–650, a minimum down payment of 3 percent, and a debt-to-income ratio no higher than 41 percent.

Thanks to these requirements, investors see conforming loans as less risky investments. Because there is a larger secondary market for conforming loans, they often have lower interest rates—and that can mean lower monthly payments and less money spent over the lifetime of the loan.

Nonconforming Loans: An Overview

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.

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 debt-to-income 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.

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.

Shopping for a nonconforming loan

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