What is a Conforming Loan?
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Find out if a Conforming Loan is the right type of mortgage for you. We’ll go over the definition, benefits, and requirements of a Conforming Loan.
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What is a conforming loan?
A conforming loan is a mortgage that is equal to or less than the dollar amount limit set by the Federal Housing Finance Agency (FHFA). For 2019, the limit is $484,350 for a single-family home. Conforming loans are also called conventional loans because they are not backed by the federal government like FHA, VA and USDA loans.
Conforming loan limits
In most counties across the country, the 2018 maximum conforming loan limit for a single-family home will be $453,100. That’s an increase of $29,000 from the 2017 baseline limit of $424,100. This marks the second year in a row that federal housing officials have raised the baseline.
In high-cost areas, the new ceiling loan limit for one-unit properties will be $679,650 in 2018, an increase of $45,650 from this year’s limit of $634,000. A “high-cost area” is any county where the median home price exceeds 115 percent of its county’s conforming loan limit build floor.
Types of conforming loans
A conforming loan is a mortgage loan that meets all the requirements to be eligible for purchase by investors such as Fannie Mae and Freddie Mac. Conforming loans follow underwriting guidelines set by government-sponsored enterprises (GSEs) and are excellent for borrowers with strong credit who can verify their income.
Conforming loans can be either fixed-rate or adjustable-rate mortgages (ARMs). With fixed-rate mortgages, the interest rate stays the same during the life of the loan, which means your principal and interest payments won’t change. With an ARM, the interest rate changes periodically, which means your monthly payment could go up or down.
There are several types of conforming loans, including:
-Conventional loans: These loans are not backed by the government but follow GSE guidelines. They typically require a down payment of at least 3%
-FHA loans: These are government-backed loans that allow for down payments as low as 3.5%.
-VA loans: These are government-backed loans available to active duty military members, veterans, and their spouses. They often require no down payment.
-USDA loans: These government-backed loans are available to borrowers in rural areas and offer 100% financing.
Benefits of a conforming loan
Conforming loans are popular because they offer borrowers a number of potential benefits. First and foremost, conforming mortgages tend to come with lower interest rates than non-conforming loans. This is thanks in part to the fact that they’re backed by Fannie Mae and Freddie Mac, which helps lenders feel confident that they will be able to recoup their investment even if the borrower defaults on the loan.
Additionally, conforming loans typically have smaller down payment requirements than non-conforming loans. In most cases, you can put as little as 3% down on a conforming mortgage, whereas you may need to put as much as 20% down on a non-conforming loan. This can make homeownership more accessible for borrowers who may not have a lot of money saved up for a down payment.
Lastly, conforming loans have more flexible underwriting guidelines than non-conforming loans. This means that it may be easier for you to qualify for a conforming loan than it would be for a non-conforming loan.
Disadvantages of a conforming loan
Conforming loans come with several disadvantages, the main ones being their strict eligibility requirements and higher interest rates.
To qualify for a conforming loan, you’ll typically need a credit score of at least 620. That’s significantly lower than the 740 or higher you’ll need to qualify for a jumbo loan. And, if your credit score is on the lower end of that620-639 range, you can expect to pay a higher interest rate for your conforming loan. So if you have a lower credit score and are looking for a larger mortgage loan, you might be better off with a jumbo loan.
Another disadvantage of conforming loans is that they typically come with higher interest rates than non-conforming loans. That’s because conforming loans are seen as less risky by lenders, so they’re not willing to give them out at lower rates. This means that if you do qualify for a conforming loan, you might end up paying more in interest over the life of your loan than you would with a non-conforming loan.
Who offers conforming loans?
Conforming loans are those that meet the guidelines set forth by Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) purchase mortgage loans from lenders, thereby providing them with the liquidity they need to continue making new home loans.
Fannie Mae and Freddie Mac only purchase loans that conform to their guidelines. That’s why these loans are called “conforming.” Non-conforming or “jumbo” loans typically carry higher interest rates because they don’t meet the qualifying standards set forth by the GSEs.
