Conforming loans: What they are and how they work
Key takeaways
- Conforming loans are mortgages that meet the criteria set by the Federal Housing Finance Agency (FHFA). They’re eligible to be purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
- These loans have set limits and guidelines for borrower credit profiles, loan amounts, down payments and property types.
- The FHFA adjusts the conforming loan limits every November to account for changes in the housing market.
If you’re shopping for a mortgage, you may have heard the term “conforming loan” thrown around. But what does it mean, how does it work — and why should you consider getting one? Here’s everything you need to know about conforming loans and how they can benefit you.
What is a conforming loan?
A conforming loan refers to a type of conventional mortgage that aligns with the criteria set by the Federal Housing Finance Agency (FHFA). Meeting its standards makes these loans eligible to be purchased by Fannie Mae and Freddie Mac. By buying mortgages, Fannie and Freddie reduce risk for lenders. This practice also frees up more money for lenders to use to fund additional mortgages.
As a result, most mortgage lenders offer conforming loans, and conforming loans are mostly what they offer. Within conforming loans, there’s the option for a fixed or an adjustable rate. Term lengths can also vary, with 15- and 30-year terms being the most popular.
Conforming loan limits and rules
A mortgage must abide by certain standards to be considered conforming and eligible for Fannie Mae and Freddie Mac to purchase. These requirements, which relate both to the borrower and the loan itself, include:
- Loan limit – 2025’s limits are $806,500 for a single-family home in most markets, but go up to $1,209,750 in higher-cost areas.
- Borrower credit score – At least 620
- Borrower debt ratios – Ideally, a debt-to-income (DTI) ratio of 36 percent or less, though it can go up to 50 percent with specific compensating factors
- Down payment/home equity – At least 3 percent down for a purchase or 5 percent equity for a refinance. However, if you put down less than 20 percent or have less than that in equity, you’ll need to pay private mortgage insurance (PMI) and will have a higher interest rate.
- Loan-to-value (LTV) ratio – As high as 97 percent, depending on the mortgage and the borrower
How the FHFA regulates conforming loans
The FHFA compares the increase or decrease in the average house price from October to October every year, as indicated by the Housing Price Index. It uses this percentage change as the basis to adjust loan limits. This method ensures that the loan limits reflect the realities of the current real estate market and allows buyers continued access to conforming mortgages.
Pros and cons of conforming loans
Pros
- Low down payment: For conforming loans, the minimum down payment is 3 percent. This amount is much lower than for a non-conforming jumbo loan, which is usually 10 (at the very least) to 20 percent, or even 25 percent.
- More readily available: Conforming loans’ popularity means you’ll have many different lenders to choose from when comparing products. Plus, since the process is standardized, you may be able to close on your home quicker and easier with a conforming loan.
- You can avoid mortgage insurance: If you put at least 20 percent down on a conventional conforming loan, you won’t need to pay for private mortgage insurance. Even if you don’t put 20 percent down, you can have PMI removed once you have 20 percent equity. The average cost of PMI is 0.46 percent to 1.5 percent of the loan amount per month, according to an analysis by the Urban Institute, so this cost can be significant.
Cons
- Borrowing limits: The home you want to buy could exceed conforming loan limits, especially if you’re in a market that expensive (but not a designated high-cost one).
- Higher credit score needed: You need a credit score of 620 or higher for a conventional conforming loan, whereas some government loans can be had for a score as low as 500.
- Limits on debts: Your debt-to-income (DTI) ratio must meet conforming loan standards set by the FHFA. The maximum DTI ratio is typically 36 percent. Sometimes, that can stretch to 43 percent or even 50 percent if you have other “compensating factors,” such as a higher credit score or a lot of savings, but it’s rare.
Conforming vs. non-conforming loans
While a conforming loan adheres to the FHFA’s standards, a nonconforming loan does not. One example of a nonconforming loan is a jumbo loan, which is used to purchase a home that exceeds the conforming loan limit for that area. Often nonconforming loan options are tailored to borrowers with credit challenges, minimum funds saved for a down payment or even a history of bankruptcy.
| Conforming loan | Nonconforming loan | |
| Eligible for purchase by Fannie Mae and Freddie Mac | Yes | No |
| Loan amounts can exceed FHFA limits | No | Yes |
| Includes government-insured loans | No | Yes |
Conforming vs. conventional loans
Both conforming loans and conventional loans refer to private (non-government) and commercial mortgage loans. A conforming loan meets specific criteria set by the FHFA, including conforming loan limits, whereas a conventional loan is any loan that isn’t guaranteed or insured by the government (FHA, VA and USDA loans).
In short: All conforming loans are conventional loans, but not all conventional loans are conforming loans.
| Conforming loan | Conventional loan | |
| Private, non-government-backed loans | Yes | Yes |
| VA, USDA and FHA loans | No | No |
| Jumbo loans | No | Yes |
How to get the best conforming loan for you
There are several steps you can take to help you get the best conforming loan for your circumstances:
1. Check your credit report
As far in advance as possible, check your credit report and history at AnnualCreditReport.com. Check your reports carefully for out-of-date items and factual errors. Dispute any errors you spot, because even minor issues can result in a lower credit score.
2. Get your documents in order
Get your paperwork together so you’re prepared for the mortgage application process. Lenders can now get a lot of information directly from banks and the IRS, but it’s still a good idea to have documents like payroll stubs, bank statements, retirement accounts, W-2 forms and tax returns handy.
3. Compare loan rates
Take the time to compare mortgage offers from at least three different lenders. Consider your needs and preferences when creating a short list of lenders to work with. You might want to start with your bank (if it offers mortgages), or consider a credit union or online lender, for example. Beyond the general terms of the loan, look closely at each lender’s fees and points.
Different lenders have different financing products available. Also, the same sort of loan’s terms may vary, depending on your creditworthiness.
You can find conforming loan rates through Bankrate, which provides mortgage rates for both 30-year and 15-year loans daily. When comparing mortgage rates, consider the following:
- If you think interest rates will rise in the coming month or so, you might choose to lock your rate to ensure the lowest rate possible.
- Interest rates may differ depending on your credentials as a borrower. Beware of rates that seem too low to be true given your financial position. If you do encounter a low rate, it could be that its percentage will be offset by bigger upfront costs. Be sure to evaluate the complete cost of the loan (interest rate and fees) carefully, as indicated by its annual percentage rate (APR).
- Remember that you can get either a fixed- or adjustable-rate mortgage. A fixed-rate mortgage generally ranges from 10 to 30 years, and the interest rate remains the same for the life of the loan. With an adjustable-rate mortgage, your interest rate stays fixed for an introductory period, usually for 3 to 10 years, and is typically lower than fixed-rate loans. After that period, the rate will fluctuate based on market factors.
4. Get preapproved
Once you find a lender you’re interested in working with, you can get preapproved for a loan. Preapproval can help expedite the financing process and uncover any issues related to your credit before they show up when you formally apply for a mortgage. Getting preapproved also helps demonstrate to a home seller that you’re a serious buyer.
5. Avoid excessive spending
Lenders will keep a close eye on your credit and spending right up until your mortgage closing date. Think of the time between when you apply for a loan and when you close as a “quiet” period, when you spend as little as possible. While your mortgage application is processing, don’t apply for any new credit, such as a credit card or personal loan, and avoid unneeded large purchases. This will help ensure the closing process goes smoothly and you receive the financing you’re expecting.
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