What Is a Conforming Loan?

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When you’re learning about mortgages, you’ll come across terms like “conventional” and “conforming.” All of this lingo can be confusing, so let’s clear up some of the mystery by outlining what you need to know about conforming loans. 

Understanding the different types of loans

There are different types of loans available to homebuyers. Some loans are backed by government agencies, such as the Federal Housing Administration (FHA) or the US Department of Veterans Affairs (VA). However, government-backed loans are far less common than private loans. 

These private loans, which aren’t backed by a government agency, are called “conventional loans.” Conventional loans can be either “conforming” or “non-conforming.” Conforming loans are more common. 

“Conforming” means the loan meets guidelines set by the Federal Housing Finance Agency (FHFA), which supervises and regulates Fannie Mae and Freddie Mac. These guidelines include limits for the loans that can be backed by, and may be acquired by, Fannie Mae and Freddie Mac. 

Pros and cons of conforming loans

Conforming loans generally have a lower interest rate than other loans because they are more secure. They are also more common and easier to secure since Fannie Mae and Fredie Mac can sell them on the secondary market. Most buyers who use conforming loans to purchase their home often pay a much lower down payment than the standard 20% as well. 

But this comes with disadvantages, too. A lower down payment may require private mortgage insurance. Plus, a conforming loan may simply not cover the cost of the purchase of your home. 

Conforming loans and conventional loans

A conforming loan is a type of conventional loan. A conventional loan is any loan offered through a private lender. A conforming loan is insured by a government-sponsored entity like Fannie Mae and Freddie Mac, but it is offered through a private bank. 

A non-conventional loan is offered through a different kind of lender like the VA or the Federal Housing Authority. They have their own terms, conditions, and are not subject to the conforming rules set by federal insurers.

Conforming vs. non-conforming loans

A nonconforming loan is a loan that does not meet the conforming standards of any government-sponsored enterprise that traditionally insures conforming loans. There are a lot of reasons a mortgage might not meet these conforming standards.

The most common type of a non-conforming mortgage is a jumbo loan—a loan that exceeds the pre-set borrowing limit of a conforming loan. Since jumbo loans aren’t backed by government insurers, they often have higher interest rates and are more difficult for banks to sell on the secondary market. 

But a loan doesn’t have to be jumbo to be nonconforming. Any loan that doesn’t meet conforming standards is considered nonconforming. A low down payment can require a nonconforming loan. A credit score below 660 might require a nonconforming loan, too. These loans might not exceed the borrowing limit of a conforming loan, but are nonconforming because they don’t meet one or another of the set conforming standards.

Tips for applying for a conforming loan

Conforming loans have relatively straightforward criteria for borrowers to follow. High credit scores, a large down payment, and low debt-to-income ratio are all required to qualify for a conforming loan. If you’re weaker in one area, focus on another to strengthen. For example, if you don’t have a credit score above 660, focus on saving enough for a larger down payment. If you only have enough saved up for a smaller down payment, do whatever you can to boost your credit score. 

Conforming loan guidelines

One of the most important guidelines is the conforming loan limit—the maximum amount of money that a homebuyer can borrow as a conforming loan. Other guidelines that affect whether a conventional loan is right for a particular homebuyer include requirements for minimum down payment, debt-to-income ratio, and credit score.

What about those non-conforming loans? The most frequently used type of non-conforming loan is a jumbo loan, so called because its amount is higher than the conforming loan limit. 

About the conforming loan limit

Every year, the Federal Housing Finance Agency (FHFA) sets a dollar amount as the upper limit for conforming loans. 

Based on the change in average US home price, this yearly limit is the maximum amount that a homebuyer can borrow to buy a home with a conforming loan. For most of the country, there is one consistent limit, called the “baseline limit.” 

The 2022 conforming loan limit 

The conforming loan limit generally increases every year. In most of the US, the baseline limit for one-unit properties in 2022 is $647,200, up from $548,250, an 18% increase. 

Remember that the limit is on the amount of the loan itself, not the price of the home you can use the loan to buy. If you subtract your down payment amount from the price of the home, you’ll get an idea whether a conforming loan is likely a good fit for you. 

The conforming loan limit and high-cost areas

The yearly limit reflects average home prices across the US and it also provides higher-than-baseline limits for areas where home prices are above average. Specifically, for counties where 115% of the local median home value is higher than the amount of the baseline limit, a limit is established based on that median (with a ceiling of 150% of the baseline limit). 

The 2022 limits (and their changes from 2021 limits) for areas where Flyhomes frequently works with homebuyers are below. 

King/Snohomish/Pierce Counties (WA)

2020: $741,750

2021: $776,250

2022: $891,250

Greater Bay Area (CA)

2020: $765,600

2021: $822,374

2022: $970,800

Los Angeles and Orange County (CA)

2020: $765,600

2021: $822,374

2022: $970,000

San Diego County (CA)

2020: $701,500

2021: $753,250

2022: $879,750

Boston (MA)

2020: $690,000

2021: $724,500

2022: $770,500

This national map from the FHFA shows limits by county. 

Why the conforming loan limit matters

You can spend more with a conforming loan in 2021 than you could in 2020, and that makes you more likely to avoid a jumbo loan. Jumbo loans come with more risk for lenders than conforming loans, so they’re more difficult to qualify for and typically have higher rates and fees than conforming loans. 

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