If you’re ready to purchase anything from a starter home to your dream home, a conforming loan offers significant benefits for both borrowers and lenders. Although you may need to meet additional criteria to qualify for a conforming loan, you could save significantly on interest rates and fees. Read on to understand how conforming loans work, if you can qualify for them, and to understand the pros and cons of this mortgage option.
What is a conforming loan?
A conforming loan or conforming mortgage is a loan product that meets Fannie Mae and Freddie Mac guidelines. Lenders who follow Fannie Mae and Freddie Mac guidelines can underwrite and fund the loans before selling them. After Fannie Mae or Freddie Mac purchases the mortgages from the lenders, the loans are sold to investors in open markets. In this way, conforming loans help support liquidity in mortgage markets.
Conforming loans generally have lower interest rates and fees than non-conforming loans due to their liquidity and government control. For borrowers, this can lead to significant savings. Conforming loans allow lenders to take loans off the books and free up liquid capital to originate additional mortgages.
How do conforming loans work?
When you start shopping for mortgages, you’ll come across different types of loans, including conforming and non-conforming mortgages and mortgages guaranteed by government agencies such as the Federal Housing Administration (FHA), Veterans Affairs (VA), and the United States Department of Agriculture (USDA). Conforming mortgages must meet certain government guidelines. For example, you will need a minimum credit score of 620 to qualify for a conforming loan.
Conforming loans are subject to dollar limits set by the Federal Housing Finance Agency (FHFA) on mortgages that Freddie Mac and Fannie Mae are willing to purchase or guarantee. For 2024, the conforming loan limit is $766,550. If you need a larger mortgage, you will need a non-conforming loan.
Freddie Mac and Fannie Mae are government-sponsored entities designed to stimulate the home loan market. These agencies have standardized rules and guidelines that single-family dwellings must follow to be eligible for support.
Fannie Mae and Freddie Mac do not issue mortgages. Instead, they insure mortgages issued by lenders, such as banks, and act as secondary market makers when lenders want to sell those mortgages.
Conforming loans are subject to stricter guidelines than non-conforming loans, ultimately benefiting both the lender and borrower. As a borrower, you’ll save more money over the life of the loan with lower fees and less mortgage insurance. You will also know that the lender is confident in your ability to repay the loan you qualify for. Lenders benefit from liquidity and greater security with conforming loans.
Conforming Loans and Non-Conforming Loans
The difference between conforming loans and non-conforming loans is specific guidelines. Although conforming mortgages meet Fannie Mae and Freddie Mac guidelines, nonconforming mortgages do not. For example, jumbo loans are a type of nonconforming loan that exceeds Fannie Mae and Freddie Mac limits. If you qualify for a conforming loan, you’ll usually get better terms and pay less interest and fees.
Conforming vs. Conventional Loans
A conventional loan is any loan that is not guaranteed or insured by the government. FHA, VA, and USDA loans are government-backed, which means they are unconventional. Other mortgages are generally conventional loans.
A conventional loan can be conforming or non-conforming. A conforming loan meets specific criteria set by the FHFA, including conforming loan limits. This means you could have a conforming or non-conforming conventional loan.
- A mortgage is a conventional loan if it is not guaranteed by the government.
- A mortgage is compliant if it meets Fannie Mae or Freddie Mac guidelines.
- Conventional mortgages can be either conforming or non-conforming.
Compliance with lending limits and rules
The FHFA sets limits each year and designates limits by county. You can’t borrow more than the annual limit, although some high-cost areas have higher limits. For 2024, the conforming loan limit is $766,550.
There are exceptions. The maximum loan limit for areas where 115% of the local median home value exceeds the base conforming loan limit will be higher. A ceiling is set at 150% of the base loan limit.
Areas with higher loan limits include Southern California, the New York metropolitan area, and South Florida. The most expensive regions are Alaska, Hawaii, Guam and the U.S. Virgin Islands, where the 2024 loan limit is 150%, or $1.15 million for single-family properties, or up to $2.2 million dollars for four-unit properties.
Additionally, to qualify for a conforming loan, you will need a down payment of at least 3% or more of the loan value. With a 20% down payment, you can avoid paying private mortgage insurance. You’ll also need a debt-to-income (DTI) ratio of 45% or less, although you may qualify for a DTI ratio of up to 50% if you have a higher credit score or a down payment. more important.
Advantages and Disadvantages of Conforming Mortgages
Although conforming mortgages have significant advantages for buyers and lenders, they do have some disadvantages. Here’s what you want to consider.
- Avoid Mortgage Insurance: With a conforming loan, you are not required to purchase private mortgage insurance if you pay a deposit of 20%.
- Low down payment: You can qualify for a conforming mortgage with a down payment as low as 3%.
- Flexible loan terms and borrowing limits: Many mortgage lenders offer conforming mortgages, allowing you to shop around and find a lender with the most favorable terms. You may also get higher borrowing limits in high-cost areas.
- Lower Annual Percentage Rates (APR): Conforming loans often have lower interest rates (APRs) than non-conforming loans. This means you could save significantly over the life of the loan.
- Debt limits: You’ll need to meet the conforming loan DTI ratio limits, which can be as low as 36% or as high as 50% if you have other factors in your favor, like a larger down payment and a high credit score.
- Higher interest rates: A conforming loan does not guarantee a favorable interest rate. You will always have to shop around to get the best options.
- Credit score requirement: You will need a credit score of at least 620. If your credit score is lower, you will need to work to improve your credit score before applying for a conforming loan.
- Borrowing limits: Borrowing limits mean you may not be able to use a conforming loan to buy your dream home, especially in markets where prices are high.
How to Apply for a Conforming Loan
If you’re ready to apply for a conforming loan, the process is similar to non-conforming or government-backed mortgages. Here are the steps to follow.
Meet the minimum requirements
The minimum borrower requirements to qualify for a conforming loan include:
- Credit score of at least 620
- Debt-to-income (DTI) ratio of 36%, or up to 50% if you have other positive factors like a high credit score or down payment
- At least a 3% down payment for a home purchase or 5% equity for a refinance
Gather all necessary financial documents
You should be prepared with pay stubs, tax returns, bank statements and other required financial statements.
Research and compare lenders
After determining your budget, you can get a pre-approved mortgage to get a clear idea of how much you can afford. You can compare interest rates and total fees to find the best options. Start by comparing the best mortgage lenders online and speaking with your local bank or credit union. Remember to shop around and compare deals to get the best options. Learn how to get pre-approved for an FHA loan or the difference between pre-approval and pre-qualification.
Complete a loan application with the lender of your choice
After you have completed the pre-approval process and found a home, it is time to complete the final mortgage application with the lender and prepare to purchase the property.
Work with the lender to complete the underwriting process
The underwriting process could be completed in as little as a week, but it can take up to six weeks to complete. You should stay in close contact with the lender throughout the underwriting process to provide any additional information requested.
Review and sign loan documents once approved
Once you have received final mortgage approval, it is time to carefully review the loan repayment terms, including prepayment penalties, interest rates, insurance requirements and fees. private mortgage. Once you are sure everything is correct, it’s time to sign and guarantee your conforming mortgage loan.
Should you use a conforming mortgage loan?
Conforming mortgages offer significant benefits to both lenders and borrowers. Conforming mortgages could save you significantly on interest and fees over the life of the loan if you meet the eligibility requirements. Ready to get started? Find some of the best conventional mortgage lenders here.
Frequently asked questions
Commercial and residential properties can be financed with conforming loans.
Yes, if you qualify, you can refinance and pay off your existing mortgage with a new conforming loan.
Interest rates for conforming loans can be fixed or adjustable.