Conforming vs. Conventional Home Loan: Do They Differ?

Conforming loans are a type of conventional loan that follow the guidelines set by the Federal Housing Finance Agency (FHFA), particularly their annual conforming loan limits. While all conforming loans are conventional, not all conventional loans are conforming, and this distinction can be easily confused during a mortgage transaction.

It benefits homebuyers to understand the specific eligibility requirements for both conforming and non-conforming loans as they decide on a home loan. In this article, we’ll cover how conforming loans work, how they compare to other conventional loans, and what factors may influence which option is right (or available) for a borrower.

What Are Conventional Loans?

Conventional loans are loans that aren’t directly backed by a specific government system and are divided into two subcategories: conforming and non-conforming. Instead of being a government-backed loan, conventional loans are issued by private lenders and may meet conforming loan limits or exceed them (as jumbo loans).

What Are Conforming Loans?

Conforming loans are a type of conventional loan that make up the majority of home loans in the U.S. The FHFA establishes conforming loan limits annually (based on the housing market) and indirectly oversees Fannie Mae and Freddie Mac—the government sponsored entities (GSEs) that purchase loans meeting conforming loan requirements from lenders. Purchasing the loans allows lenders the money to lend more mortgages, which encourages more Americans to become homeowners.

Conforming loans require borrowers to meet the applicable loan limits and other eligibility requirements set by the GSEs. Understanding these requirements can help you decide which loan option best suits you and your financial needs.

Conforming Loan vs. Other Conventional Loans

Given that conforming loans are a subset of conventional loans, all conforming loans are conventional loans, but not all conventional loans are conforming loans. Some conventional loans can be non-conforming if they exceed conforming loan limits, or have different underwriting guidelines, making them ineligible to be purchased by Fannie Mae or Freddie Mac.

Jumbo loans, for instance, are common examples of non-conforming conventional loans. They aren’t insured by a government agency–making them conventional loans–yet they exceed the conforming limits set by the FHFA.

Since conforming loans are within FHFA guidelines, they usually come with more favorable costs than non-conforming choices. Comparing your options and understanding how conforming loans differ from non-conforming loans will help you determine which loan program is best for you.

Understanding FHFA Regulations

To qualify for a conforming loan, borrowers will need to follow FHFA regulations and lending requirements.

• Borrower profile qualifications: To qualify for a conforming loan, lenders require borrowers to have a credit score of at least 620, and a debt-to-income ratio (DTI) between 36%-50%.
• Loan-to-value (LTV) ratio: Down payments under 20% usually require private mortgage insurance to protect your lender, but borrowers can put down as little as 3% to make a home purchase.
• Loan Limits: The FHFA establishes new conforming loan limits at the end of each year, which can vary in different regions. Limits are adjusted annually to reflect changes in the national average home price.

The FHFA’s loan limits are critical when determining whether a loan is conforming or non-conforming. Be sure to understand the current loan limits and eligibility requirements to find out which loan you’ll likely qualify for.

How to Choose the Right Type of Conventional Loan

The type of conventional loan that may be best for you depends on a few different factors. These factors may be influenced by your financial goals and immediate needs.

• Property cost: More expensive homes could lead to higher borrowing amounts. If a home’s list price requires loan amounts that exceed the FHFA’s limits, a non-conforming jumbo loan might become necessary.
• Interest rates: Conforming loans typically come with slightly lower interest rates and costs because of their adherence to Fannie Mae and Freddie Mac’s eligibility requirements. While many conforming loans have fixed rates, borrowers should also explore the potential of money-saving adjustable-rate options–keeping in mind that rates can change according to market conditions.
• Down payment: Some buyers think they need to put 20% down to purchase a home, yet most conventional loans allow down payments as little as 3%-5%--though these may come with slightly higher rates and fees. Down payments less than 20% typically require PMI, but larger down payments (if you can afford them) help you qualify for more competitive rates and costs.
• Your financial situation: Your credit score and DTI ratio can affect your eligibility for a conforming conventional loan. Generally, borrowers with stronger credit and lower DTI ratios are more likely to qualify for a conforming loan, while borrowers with lower credit scores or higher DTI ratios may need to consider a non-conforming loan.

While these are some of the most important components when deciding which conventional loan is for you, lenders will offer varying rates and loan options depending on your circumstances. To get a better idea of how much “house” you can afford, check out our home affordability calculator to better understand your mortgage options.

Conforming Loan vs. Conventional Loan FAQs

Here are some additional questions you may have about conforming vs. conventional loans.

What Are Examples of Conforming Loans?

Conforming loans can be both fixed-rate and adjustable-rate mortgages, as long as they meet the FHFA’s conforming loan limits and eligibility requirements. Jumbo loans and government-backed programs like VA Loans and FHA loans are common alternatives to conforming loans.

What Makes a Conventional Loan Non-Conforming?

Conventional loans become non-conforming when they don’t meet the criteria established by Fannie Mae and Freddie Mac. Borrowing amounts that exceed the FHFA’s conforming loan limit, loans with less traditional loan terms, and transactions with higher risk factors will often determine whether a loan is nonconforming.

Is a Conforming Loan the Same as a Conventional Loan?

No, conventional and conforming loans are not the same, despite being closely related. Conventional loans describe loan programs that are not insured or “backed” by any government agencies, while conforming loans are a subcategory of conventional loans that are within the conforming loan limit established by the FHFA each year.

Final Thoughts: Conforming vs. Other Conventional Loans

The terms “conforming” and “conventional” are closely related in real estate transactions, but understanding their differences can be beneficial for buyers looking to purchase a home. Conforming loans need to meet FHFA loan limits and eligibility requirements, while non-conforming loans do not. Factors like your financial situation, property costs, and interest rates directly impact which loan option you select; so taking the time to compare your options and evaluate your eligibility will help you approach your home purchase with confidence.

If you’re ready to take the next step, get prequalified today to explore your conventional loan options and find the mortgage that’s right for you.