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What is a conforming loan, and how do you qualify?

Yahoo Personal Finance· Getty Images
5 min read

If you have a relatively strong financial profile, you have your pick of types of mortgage loans. One of the most common options is a conforming loan, which you can qualify for with a certain credit score, down payment, and debt-to-income ratio (DTI). We’ll explain what a conforming loan is, how it works, and whether you should get one.

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A conforming loan is a type of conventional loan, though the two terms are often used interchangeably. Conventional mortgages aren’t insured by government agencies like the Federal Housing Administration, U.S. Department of Veterans Affairs, or U.S. Department of Agriculture. A conforming loan is probably the most common type of mortgage loan and what many picture when they think of a “regular mortgage.”

Conforming loans follow federal Family Housing Finance Agency (FHFA) loan limits. They are typically guaranteed by government-sponsored enterprises Freddie Mac and Fannie Mae.

You aren’t eligible for a conforming mortgage if you need to borrow more than the limit set by the FHFA. For example, you can’t finance a $5 million home anywhere in the United States with a conforming home loan — you’d need to apply for a jumbo loan.

  • The loan amount should fall under the FHFA loan limits, which is $766,550 in most parts of the U.S.

  • A minimum down payment of 3% — a 20% down payment is required to avoid paying for private mortgage insurance (PMI).

  • A credit score of at least 620.

  • Employment and income records for two years.

  • Debt-to-income (DTI) ratios vary by lender and can be up to 50% with a large cash reserve, high down payment, or higher credit score.

Non-conforming loans differ from conforming ones in that they offer flexibility with maximum borrowing limits and/or payment schedules. They aren’t backed by Freddie Mac or Fannie Mae, so they don’t have to follow all of their rules. Here are some common types of non-conforming loans:

  • Jumbo loan: This is still a conventional loan, but it’s for a larger amount and generally requires a higher credit score. You’ll also need to show you can afford a larger mortgage.

  • FHA loan: This is a government-backed mortgage insured by the Federal Housing Administration (FHA). You can qualify with a lower credit score, but FHA loans have lower borrowing limits.

  • VA loan: This mortgage is insured by the U.S. Department of Veterans Affairs (VA) and is for military-affiliated homebuyers. It doesn’t require a down payment.

  • USDA loan: This third kind of government-backed mortgage is insured by the U.S. Department of Agriculture. It’s for lower-income borrowers who are buying in rural areas. It also doesn’t require a down payment.

  • Interest-only mortgage: This loan only requires you to make payments on interest, not the principal, at the beginning of your term.

  • Hard-money loans: Hard money loans (also known as bridge loans) are for people who need a short-term loan, such as those moving from one house to another very quickly.

  • Purchase-money mortgage: With a purchase-money mortgage, the buyer makes payments to the seller rather than a lender. This is a workaround for buyers who are unable to secure bank financing, but the seller still wants to sell them the home.

Read more: FHA vs. conventional loan — Which should you choose?

The FHFA sets conforming loan limits annually, and the 2024 limit is $766,550 for a single-unit dwelling in most of the United States. The maximum loan limit for Alaska, Hawaii, Guam, and the U.S. Virgin Islands is $1,149,825. High-cost areas in certain parts of the contiguous United States also have higher limits.

Check out this interactive map to find out what the limit is in your county.

  • Lower interest rates than jumbo loans.

  • Most mortgage lenders offer conforming loans.

  • Sellers are more likely to accept borrowers with conforming loans than FHA loans because the FHA has stricter appraisal guidelines.

  • Many lenders allow a 3% down payment, which is even lower than the 3.5% required by FHA loans.

  • You can’t purchase a home above the FHFA’s conforming loan limits — you’d have to apply for a jumbo loan.

  • Government-backed loans may be available with lower credit score and DTI ratio barriers.

  • FHA, VA, and USDA loans offer streamline refinancing for a faster process with no appraisal. Conforming loans don’t have an equivalent.

Learn more: FHA Streamline Refinance: How does it work, and who is eligible?

A conforming loan is a type of conventional loan with borrowing limits set by the Federal Housing Finance Agency (FHFA) and backed by government-sponsored entities Freddie Mac or Fannie Mae.

A conforming loan can be a good option for borrowers with good credit scores and moderate debt-to-income ratios.

Credit scores for a conforming loan generally start at 620.

FHA loans aren’t conforming loans — they are government-backed mortgages insured by the Federal Housing Administration.

This article was edited by Laura Grace Tarpley