A conforming loan is a mortgage that meets the requirements to be purchased by housing finance giants Fannie Mae or Freddie Mac. If you’re in the market for a home, you’ve probably heard this term, along with others, such as nonconforming loan and conventional loan.
As you choose the right loan for your needs, you should understand the features of a conforming loan. Keep reading for a breakdown of what a conforming mortgage is and whether it’s the right product for you.
What Is the Difference Between Conforming and Nonconforming Loans?
As the name implies, a conforming mortgage must meet, or conform to, Freddie Mac and Fannie Mae purchase criteria, including:
- The dollar limit on the size of the loan set by the Federal Housing Finance Agency, or FHFA
- The type of property
- The down payment and borrower’s credit history
When a loan exceeds FHFA loan limits, it may be referred to as a jumbo loan and cannot be purchased by Fannie or Freddie. Jumbo loans usually have stricter rules, such as higher credit score or cash reserve requirements, compared with other types of mortgages because the borrower is taking on a large amount of debt.
Mortgages are also considered nonconforming when they do not meet the other purchase requirements of Fannie Mae and Freddie Mac, says Mike Laffey, branch production manager for Silverton Mortgage in Charlotte, North Carolina.
Fannie Mae and Freddie Mac use strict underwriting criteria, including credit score and debt-to-income ratio guidelines, for the loans they buy and sell on the secondary market. They allow lenders to offload risk and pass on better rates and terms to borrowers.
What Is the Conforming Loan Limit for 2020?
The conforming loan limit in 2020 for single-family dwellings is $510,400. That’s an increase from 2019’s limit of $484,350.
Limits are higher for multifamily properties. The caps in 2020 are:
- $653,550 for a two-unit property
- $789,950 for a three-unit property
- $981,700 for a four-unit property
What Is a High-Balance Conforming Loan?
Although most counties follow the baseline limits, some areas with higher-than-average property values will have higher conforming loan limits, says Doug Leever, mortgage sales manager for South Florida’s Tropical Financial Credit Union.
In Florida, only Monroe County – home to the Keys – has a median home value that exceeds the typical conforming loan limit, he adds.
Other high-cost areas tend to be on the West Coast as well as in the Northeast, Alaska and Hawaii. For a single-unit home in these areas, the conforming loan limit in 2020 is $765,600.
Counties in these areas allow high-balance conforming loans that exceed the baseline limit. High-balance conforming loans must also follow the lending guidelines set by the FHFA.
You can find the conforming loan limit for your area here, or speak with a mortgage professional.
Is a Conforming Loan the Same as a Conventional Loan?
Some people use the terms conforming loan and conventional loan interchangeably, but there is a difference.
A conventional loan is simply a loan that does not have government backing or insurance. Some of the government agencies that secure mortgages include the Federal Housing Administration, the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs.
All conforming loans are conventional loans, but not all conventional loans are conforming loans. Take this example: A jumbo mortgage cannot be a conforming loan because it exceeds Fannie and Freddie’s loan limits, but it can be a conventional loan if it meets certain lending standards.
How Can You Get a Conforming Loan?
You’ll need to meet guidelines set by Fannie and Freddie to qualify for a conforming loan. These include:
- A credit score of at least 620
- A debt-to-income ratio of up to 45% – and 50% in some cases
- A stable and verifiable income
Debt-to-income, or DTI, ratio refers to how much of your income is needed to cover your monthly debt payments. If you earn $7,000 per month and you pay $2,000 for your home loan and $1,000 for your other monthly bills, your DTI would be about 43%.
An income situation that is straightforward can also be helpful. “The way we verify income has to be very traditional,” Laffey says.
A W-2 showing steady income can make qualifying easier than if you have fluctuating self-employed income or if you have job-hopped in the last couple of years. That’s not to say that freelancers or entrepreneurs can’t get conforming loans, but they could have to jump through more paperwork hoops to get them.
If you can’t quite meet the standards for conforming loans, do not worry, Laffey says. “There’s a marketplace and other programs available for people who don’t fit that box,” he says.
Is a Conforming Loan Good?
When you get a conforming loan, you are working within limits the FHFA has deemed low risk.
A conforming loan can offer a great deal if you meet borrowing criteria, Laffey says. “If you can do the pay stubs and W-2s, and your credit and debt ratios are in line, you can end up with better terms” with a conforming loan, he says.
But most important, adds Leever, is to “shop around and get with a trusted lender.”