When you’re looking to get a mortgage, there are set limits on the amount you’re able to borrow. A conforming loan is a mortgage loan that conforms to the guidelines and limits set by government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac.
The GSEs simply set the rules for how to qualify for a conforming mortgage, how much you can borrow, and how the loan may be structured.
How do conforming loans work?
Conforming loans are popular because they typically offer lower interest rates compared to non-conforming or jumbo loans, which exceed the maximum loan limits set by the GSEs. By conforming to these standards, lenders can sell these loans more easily in the secondary mortgage market, which promotes liquidity in the mortgage industry and helps keep interest rates competitive for borrowers.
Depending on your lender, a conforming loan can be structured as either a fixed-rate loan or an adjustable-rate mortgage (ARM). A fixed-rate loan refers to the fact that the interest rate will remain the same throughout the life of the loan. This can be beneficial when interest rates are low so you can lock in for the life of the loan. An ARM is tied to a financial index and the interest rate can adjust over the life of the loan.
Is a conforming loan a conventional loan?
A conventional loan refers to a type of home loan that is not insured or guaranteed by the government. Whereas a conforming loan generally refers to the loan size or loan limit. Therefore, a conforming loan can encompass several other loan programs such as:
- Conventional Loans
- Federal Housing Administration (FHA) Loans
- VA Loans
Conforming loan limits in 2024
It's important to note that loan limits and guidelines change over time, so it's essential to check the current limits and requirements when considering a conforming loan. The current conforming loan limit for 2024 is $766,550 for a single-unit property. However, it does vary depending on your location, with a higher limit in places like Alaska and Hawaii.
That’s because the price of a home fluctuates in these “high-cost” locations — and so do their high-cost county limits. Other factors that can influence these limits are the size of the house and whether it’s multi-family or single-family. Make sure you check out the conforming loan limits for your specific location and home type.
And, if you’re looking at homes that exceed the conforming loan limit for your county, then you may want to consider applying for a jumbo loan. Jumbo loans allow for higher loan limits, but require higher credit scores and larger down payments.
Do you qualify for a conforming loan?
Qualifying for a conforming loan involves meeting specific eligibility criteria set by the GSEs, as well as your lender's requirements. Here are the key factors that lenders typically consider when evaluating your eligibility for a conforming loan:
- Credit score: While specific credit score requirements may vary between lenders, a credit score of 620 or higher is often considered the minimum threshold. Of course, to secure the best interest rates and terms, a higher credit score is preferred.
- Credit history: Lenders will review your credit history to assess your financial responsibility. They look for a history of timely payments on credit accounts, as well as any negative marks, such as bankruptcies, foreclosures, or collections.
- Income verification: You'll need to provide proof of your income over two years, such as pay stubs, W-2 forms, and tax returns. Lenders will use this information to calculate your debt-to-income ratio (DTI), which compares your monthly debt payments to your monthly income.
- Employment history: Having a steady job or source of income can boost your eligibility. If you recently changed jobs or have irregular income, it may be more challenging to qualify. That’s why lenders will need to see proof of steady employment over at least two years.
- Down payment: Though conforming loans may allow for down payments as low as 3% of the home's purchase price, having a larger down payment can improve your eligibility and potentially reduce the need for private mortgage insurance (PMI).
- Debt-to-Income Ratio (DTI): Your DTI is a significant factor in the approval process. Agency guidelines typically require a DTI no greater than 50%. DTI includes your housing-related expenses, credit card payments, car loans, student loans, and other monthly payments.
- Appraisal and property: The property you intend to purchase must meet certain appraisal requirements to ensure its value is sufficient to support the loan amount.
- Documentation: Be prepared to provide extensive documentation, including 60-days of bank statements, asset verification, and other financial records. If you recently deposited a large amount into any of your accounts, be prepared to explain where that money came from. Lenders use all of this information to verify your financial stability and capacity to repay the loan.
- Private Mortgage Insurance (PMI): If your down payment is less than 20% of the home's purchase price, you will likely need to pay for PMI. This insurance protects the lender in case of default. The cost of PMI can affect your eligibility and overall affordability.
- Loan Limits: Ensure that your loan amount falls within the conforming loan limits established by the GSEs. These limits vary by location and can change annually.
Is a conforming loan right for you?
As with all loan options, understand that there is no one-size-fits-all. For the most part, a conforming loan may come with a competitive interest rate and peace of mind that your lender meets Fannie Mae and Freddie Mac’s guidelines.