- Lower borrowing costs: Homebuyers with solid credit and a reasonable debt-to-income ratio (DTI) can qualify for the best rates and terms. You could be better off with a government-backed loan if your credit score is lower.
- Accessibility: Conforming loans are generally easier to get than non-conforming loans, which aren’t as accessible, since they come with several hurdles to clear to qualify for funding. Most lenders want a stellar credit score, a sizable down payment, and hefty reserves for a non-conforming loan. They also have stricter guidelines regarding your DTI compared to conforming loans.
- Lending process: Fannie Mae and Freddie Mac impose standard underwriting guidelines for conforming loans. Consequently, the lending process is often easier than with non-conforming loans.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
Updated March 14, 2024
In a nutshell
A conforming loan is a mortgage product that meets Fannie Mae and Freddie Mac guidelines.
- For 2024, the loan limit is $766,550 for most houses and up to $1,149,825 in high-cost areas.
- The loan limit is set by the Federal Housing Finance Agency (FHFA) and changes annually based on the House Price Index.
- Borrowers must also have a credit score of at least 620 and meet the debt ratio guidelines. For the latter, you’ll need a back-end and front-end ratio of no more than 28% and 36%, respectively.
- A down payment of as little as 3% is allowable for purchases, but putting down more can help you avoid needing private mortgage insurance (PMI).
- Limits are also in place for the maximum loan-to-value (LTV) ratio. It can sometimes be as high as 97%, but 80% or lower is preferred.
How does a conforming loan work?
Conforming loans are sold to Fannie Mae or Freddie Mac, the federally funded and guaranteed home mortgage companies created by the United States Congress, following closing. This allows lenders to remove mortgage debt from their books and offer more loans.
Once the loan closes, it is bundled with others to create mortgage-backed securities. These are sold to investors on the secondary mortgage market, offering a steady income stream to investors looking to grow their money.
Pros and cons
There’s a lot to love about conforming loans, but there are also disadvantages to consider when deciding if it’s the right choice.
Pros:
Cons:
- Reduced borrowing power: You'll likely need to explore other mortgage options if you have your sights set on a luxurious home. This is common in higher-priced markets, where a ceiling of $1,089,300 may not be enough to meet your home-buying budget.
- More stringent eligibility requirements: Conforming loans have tighter lending guidelines than their government-backed counterparts. You can get an FHA (Federal Housing Administration) loan with a credit score of just 580 with a 3.5% down payment (or 500 with a larger down payment). Some government-backed mortgages don’t have a minimum credit score. You’ll also have more flexibility with the allowable DTI on government loans.
- Requires more cash upfront to avoid mortgage insurance: Long gone are the days of having to put 20% down to get a conforming loan. You can qualify with just 3% down, but there’s a significant downside in that you’ll likely have to pay for private mortgage insurance until you have at least 80% in equity.
Conforming loans vs. nonconforming loans vs. conventional loans
You’ll typically find that conforming loans are more affordable than non-conforming loans. You'll need PMI with a smaller down payment, but the closing costs may be lower, resulting in lower out-of-pocket costs at closing.
Conforming and conventional loans are often considered the same product but that’s not entirely true: All conforming loans are categorized as conventional loans, however, there are instances where conventional loans fail to meet FHFA standards. Therefore, they are grouped into the bucket of non-conforming loans.
To illustrate, FHA, USDA (United States Department of Agriculture) and VA (Veterans Affairs) loans fall below the conforming limits. Still, they are labeled as non-conforming loans.
What are conforming loan limits?
In the current year, the conforming loan limit on a single-family home is $766,550. However, if purchasing property in an expensive region, the ceiling could extend up to $1,149,825. Locations incorporating most of Alaska, California, the District of Columbia, Hawaii, parts of southern Florida, and New York City, fall under this higher ceiling. Guam and the U.S. Virgin Islands also have historically had higher loan limits.
This number represents a big increase from the 2022 limit of $647,200, because home prices have been going up since the end of the pandemic. For higher-cost areas in 2022, the limit was $970,800. The high ceilings show how real estate is changing and how much prices are rising in popular places.
When should you get a conforming loan?
There are several instances where a conforming loan could make sense. It's worthwhile if you're considering a property with a purchase price at or below the limit. You’ll often find that the interest rates are more favorable than other loan products. This is particularly true if you have excellent credit and meet the lending criteria. A conforming loan also makes financial sense if you plan to make a down payment of at least 20%. In this case, you can avoid PMI, which could add hundreds of dollars to your monthly mortgage payment.
Frequently asked questions (FAQs)
What is an example of a conforming loan?
A home loan that is at or below $766,550 (or up to $1,149,825 in higher-cost areas) is conforming. It must also adhere to the standards set forth by the FHFA. Not all conventional loans are conforming, but all conforming loans are conventional.
Is a conforming loan the same as an FHA loan?
The loan limit for an FHA loan is far below the conforming loan ceiling, yet it's not considered a conforming loan. Instead, it's a mortgage insured by the Federal Housing Administration.
Do conforming loans have higher interest rates?
Conforming loans usually do not have higher interest rates than non-conforming loans. Often, in fact, conforming loans actually have lower interest rates.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.