What Is a Conforming Loan?

Definition & Examples of Conforming Loans

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A conforming loan is a mortgage that meets the terms set by the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac.

Learn how a conforming loan works, along with its dollar limits and pros and cons, to determine whether it's the right type of mortgage for you.

What Is a Conforming Loan?

A conforming loan is a home loan that falls within the loan size limits set by the FHFA and adheres to other rules established by Fannie Mae and Freddie Mac, two government-sponsored companies that are regulated by the FHFA . A loan that meets these conditions allows Fannie Mae and Freddie Mac to buy your mortgage from your lender and convert it into an investment product.

How a Conforming Loan Works

To achieve the FHFA's goals of liquidity, affordability, and stability in the mortgage market, Fannie Mae and Freddie Mac buy mortgages on the secondary market and then either package them into securities or hold them in a portfolio.

However, Fannie Mae and Freddie Mac are restricted by law to buying conforming loans that are no larger than the limits set by the FHFA. These limits, known as the conforming loan limits, vary by year and location.

Conforming loans also have other underwriting criteria. For example, Fannie Mae has rules for lenders that take into account loan-to-value ratio, debt-to-income ratio, and credit score.

Let's say that a lender wants to get mortgages off its own balance sheet. If it makes a loan that meets guidelines set forth by the FHFA, Fannie Mae, and Freddie Mac, it knows that Fannie Mae or Freddie Mac will potentially buy the loan later. As such, the lender looks at the rules set by Fannie and Freddie and then creates a conforming loan. You, as a qualifying buyer looking to finance a home, obtain the loan. Eventually, the lender sells your mortgage to Fannie Mae, freeing up more capital to make more loans in order to keep the mortgage market affordable and stable. As the borrower, you'll usually get a loan ownership transfer notice indicating that your mortgage was sold.

Call the mortgage servicer listed on your mortgage statement or send them a written request to find out who owns your mortgage, which can change over time. You can also use the "Fannie Mae Mortgage Lookup Tool" and Freddie Mac's "Loan Lookup Tool" to confirm whether your mortgage is owned by one of these companies.

How Much Can I Borrow in Conforming Loans?

For loans to be acquired by Fannie Mae and Freddie Mac, the FHFA announced an increase in the maximum conforming loan limit to $548,250 for 2021, up from $510,400 for 2020.

But if you want to know what to expect from your own local area, the FHFA offers a complete list of conforming loan limits by county in the United States. Within a county, limits vary by the number of units within a dwelling, ranging from one to four.

The Housing and Economic Recovery Act (HERA) requires the conforming loan limit to be adjusted each year to reflect changes in the average price of homes in the U.S. As prices rise, the conforming loan limit does, too, so housing remains attainable for middle- and lower-income buyers.

As such, high-cost areas offer “conforming jumbo” loans that are still part of the conforming program but have higher loan limits for one-unit properties—up to 150% of the baseline. In those areas, the maximum loan amount for 2021 is $822,375.

The loan limit is calculated slightly differently in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where a baseline limit of $822,375 applies to loans for one-unit properties in 2021.

Pros and Cons of Conforming Loans

  • Manageable loan size

  • Lower interest rate

  • Potential for a smaller down payment

  • Don't need perfect credit

  • Restrictive loan limits

  • Harder for debt-burdened, poor-credit borrowers to get

Pros Explained

The advantages of getting a conforming loan include:

  • Manageable loan size: The conforming loan limit encourages homebuyers to buy a house they can afford, which may reduce the risk of default and foreclosure.
  • Lower interest rate: Conforming loans tend to carry lower interest rates, which can save a bundle over the life of the loan.
  • Potential for a smaller down payment: Although a down payment of at least 20% is desirable as it avoids the need for mortgage insurance, both Fannie Mae and Freddie Mac back loans with loan-to-value ratios (the portion of the loan not covered by the down payment) of as high as 97%, or a down payment of as low as 3%. 
  • Don't need perfect credit: Fannie Mae and Freddie Mac establish a minimum FICO score of 620 for the mortgages it backs, which translates to an attainable score of "fair" or better. 

Cons Explained

The drawbacks of conforming loans include:

  • Restrictive loan limits: The conforming loan limits may be too restrictive for your needs (if you plan to buy a luxury home, for example), and you may live in an area where conforming jumbo loans with higher limits aren't available.
  • Harder for debt-burdened, poor-credit borrowers to get: Fannie Mae and Freddie Mac reduced the debt-to-income ratio after the financial crisis of 2008 to curb risk. This action and the minimum credit score requirement mean that borrowers with too much debt relative to their income, or poor credit, may have difficulty getting conforming loans.

Conforming vs. Conventional Non-Conforming Loan

Conforming loans are the most popular type of conventional loan, which is any loan not insured or backed by the government. The other type of conventional loan is a non-conforming loan, which is a mortgage that doesn't adhere to the loan limits and rules discussed earlier.

Instead, the limits and terms of non-conforming loans vary greatly by the lender and the type of non-conforming loan. Non-conforming jumbo loans typically exceed the limits of conforming jumbo loans, maxing out at $1 to $2 million in 2019. These loans may come with higher down payment and credit requirements but may be suitable for those buying high-priced luxury homes. "Other" non-conforming loans are those of any size. Some are geared toward low-income buyers; others are geared toward those with complex finances (the self-employed, for example) or properties with non-standard features (more than 10 acres, for example). However, they tend to come with higher interest rates and can be risky.

For average homebuyers, a conforming loan makes sense. As long as you’re within the loan limit and meet the basic underwriting criteria, these loans often provide you with the best terms as long as you meet credit requirements.

Conforming loan Conventional non-conforming loan
Adheres to guidelines set by the FHFA, Fannie Mae, and Freddie Mac Doesn't adhere to the aforementioned guidelines
Lower loan limits Loan limits may be higher than conforming loan limits
Lower interest rates and potential for smaller down payments Higher interest rates and down payments
Better suited for the average buyer Better suited for those with complex finances or non-standard properties

Key Takeaways

  • A conforming loan is a mortgage that conforms to FHFA loan size limits and other rules set by Fannie Mae and Freddie Mac.
  • Loans must adhere to the requirements in order to be later sold to Fannie Mae and Freddie Mac, which ultimately adds liquidity and stability to the mortgage market.
  • The conforming loan limit varies the county and changes annually to reflect changes in the average home prices in the U.S.
  • Conforming loans are beneficial to borrowers because of their manageable loan size, lower interest rate, the potential for a smaller down payment, but the limit may be restrictive to some.
  • Conforming loans are a more common and appropriate type of conventional loan for average buyers than non-conforming loans, which have non-standard loan size limits.