A conforming loan is a type of conventional mortgage that's limited to about $550,000 in most of the US
Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.
- A conforming loan is a type of conventional loan, or a mortgage not backed by the government.
- The FHFA sets the borrowing limit for conventional loans, which is $548,250 in most parts of the US in 2021.
- You'll need a nonconforming loan to borrow more than the limit set by the FHFA, and you'll probably have to meet stricter requirements than you would for a conforming loan.
- You may prefer a government-backed loan over a conforming loan, especially if you're of low-to-moderate income or have served in the military.
- Sign up for Personal Finance Insider's email newsletter here »
What is a conforming loan?
A conforming loan is a type of conventional loan, or a mortgage not backed by a government agency such as the FHA.
A conforming loan meets the borrowing limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year, and in 2021, the limit is $548,250 in most parts of the US. In areas with a higher cost of living, such as Alaska, Hawaii, Guam, and the US Virgin Islands, the limit has been bumped up to $822,375.
Conforming loans vs nonconforming loans
Both conforming and nonconforming loans are types of conventional mortgages. The differences come down to the amount you borrow and the eligibility requirements.
You'll get a conforming loan if you need to borrow an amount under the limit set by the FHFA. You'll need a nonconforming loan, otherwise known as a jumbo mortgage, if you need to borrow more.
For a conforming loan, most lenders require at least a 620 credit score and between a 36% and 50% debt-to-income ratio. You'll also need a 10% down payment, or just 3% if your conforming loan is backed by government-sponsored mortgage companies Freddie Mac or Fannie Mae.
Eligibility requirements for nonconforming loans are a bit stricter, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming loans, but you'll likely need a higher credit score, lower DTI, and bigger down payment than you would for a conforming mortgage.
Conforming loans vs other types of mortgages
A conforming loan is a type of conventional loan, but you don't necessarily need to get a conventional mortgage. Instead, you may opt for a government-backed mortgage.
Each type of government loan has its own eligibility requirements. There are three main types of government-backed mortgages:
- FHA loans: You can get a mortgage with a lower credit score and higher DTI than with a conforming loan, and you'll need a 3.5% down payment.
- VA loans: Military families can get VA loans with no down payment.
- USDA loans: You can buy a home with no down payment if you have a low-to-moderate income and are buying in a rural or suburban area.
You may find that one of these types of mortgages is a better fit than a conventional mortgage, even if you're borrowing an amount that qualifies you for a conforming loan.
The pros and cons of conforming loans
Before applying for a conforming loan, consider its advantages and disadvantages versus a nonconforming loan, and versus government-backed loans.
- Less stringent requirements than nonconforming loans. You can qualify for a conforming loan more easily than for a nonconforming loan. A jumbo mortgage often requires a better credit score, lower debt-to-income ratio, and higher down payment.
- Lower interest rates than for some mortgages. Lenders usually charge lower rates on conforming loans than on nonconforming loans.
- Stricter requirements than for some loans. With government-backed mortgages, you may qualify for a loan with a lower credit score, higher DTI, and/or a lower down payment than you would with a conforming loan. The exact requirements will depend on which type of government loan and which lender you choose.
- Borrowing limit. You can only borrow a certain amount with a conforming loan. If you need more than the FHFA allows, you'll want to go with a nonconforming loan.
- Private mortgage insurance. If you have less than 20% for a down payment, you'll have to pay for PMI until you gain more equity in your home. PMI typically costs between 0.2% and 2% of your mortgage amount. Although you have to pay for mortgage insurance and other fees with government-backed loans, you won't have to pay for PMI. Avoiding PMI could save you money over time.
- Higher interest rates than for some other mortgages. Most lenders charge lower mortgage rates on FHA, VA, and USDA loans than on conforming loans.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
Source: Read Full Article