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What is a Conforming Loan?

What you'll learn: How conforming loans work and if they’re right for you


What Is a Conforming Loan?

Decades ago, to boost home ownership, two government-sponsored enterprises were created — Freddie Mac and Fannie Mae. In the mortgage business, lenders typically sell their mortgages in bulk to other financial entities, which allows lenders to continue lending. Freddie Mac and Fannie Mae have a set of guidelines and standards that assists lenders in offering and selling loans. It's these guidelines that set the "conforming" standards.

Conforming standards simply set the rules for how to qualify for a mortgage, how much you can borrow, and how the loan may be structured. This protects you, as well as typically offering a lower interest rate than non-conforming loans.

How Do I Qualify for a Conforming Loan?

  • Have a minimum credit score somewhere between 620-700. While that's a wide range, credit score requirements can depend on the loan type, down payment, and other factors.
  • Aim for a debt to income ratio (DTI) that does not exceed 36-50%. Again, this depends on several factors like loan type and down payment.
  • Prepare to pay a down payment.
  • Shoot to be under the loan limit — a maximum loan amount set by the Federal Housing Finance Agency (FHFA). 

What's the Difference Between a Conforming Loan and a Conventional Loan?

A conventional loan is one that is not insured or guaranteed by the government. 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

How Do Conforming Loans Work?

Perhaps the easiest way to think about a conforming loan is the loan limit set by the FHFA. For 2022, the maximum amount for a conforming loan for a single-unit property is $647,200.

Depending on your lender, a conforming loan can be matched either with 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 can adjust over the life of the loan.

Is a Conforming Loan Right for Me?

As with all loan options, it's important to understand there is no one-size-fits-all. For the most part, a conforming loan may come with a lower interest rate and peace of mind that your lender meets Fannie Mae and Freddie Mac’s guidelines. A loan limit set by conforming loans may be a challenge if you are looking to purchase in an expensive area within the U.S., in which case you may want to consider a Jumbo loan.

To learn more about PenFed conforming loans or what loan is right for you:

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