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What Are Conforming Loans?
Fannie Mae and Freddie Mac are the two mortgage giants that set the agency mortgage guidelines on conventional loans. Conventional loans are often referred to as conforming loans. Conventional loans are referred to as conforming loans because the two giant government-sponsored enterprises (GSEs) will not purchase conventional loans on the secondary market if conventional loans do not conform to their mortgage standards.
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Conforming loans, also known as conventional conforming loans, refer to mortgage loans that meet the guidelines and loan limits set by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. Here are some key points about conforming loans:
- Loan Limits: There are maximum loan amount limits for conforming loans, which vary based on the location and the number of units in the property. For most counties in the U.S., the 2023 conforming loan limit for a single-family home is $726,200.
- Credit Score Requirements: Borrowers typically need a minimum credit score of 620 to qualify for a conforming loan, although some lenders may have stricter requirements.
- Down Payment: A minimum down payment of 3% is usually required for conforming loans, although loan-to-value ratios above 80% require private mortgage insurance (PMI).
- Income and Employment Verification: Lenders will thoroughly verify the borrower’s income, employment history, and assets to ensure they can repay the loan.
- Property Standards: The property being purchased or refinanced must meet certain standards and appraisal requirements set by the GSEs.
- Debt-to-Income Ratio: Most conforming loans have a maximum debt-to-income ratio (DTI) of 43-45%, meaning the borrower’s monthly debts shouldn’t exceed that percentage of their monthly income.
- Mortgage Insurance: For down payments less than 20%, borrowers must pay private mortgage insurance (PMI) or an upfront mortgage insurance premium (MIP) for FHA loans.
- Interest Rates: Conforming loans generally have lower interest rates compared to non-conforming or jumbo loans because they are backed by Fannie Mae and Freddie Mac, which reduces risk for lenders.
The key advantages of conforming loans are their relatively low interest rates, flexible down payment requirements, and the ability to be sold to Fannie Mae and Freddie Mac, which provides liquidity to the mortgage market.
Non-conforming loans, such as jumbo loans or non-qualified mortgage (non-QM) loans, are for loan amounts above the conforming limits or for borrowers who don’t meet the strict conforming guidelines.