What is a conforming mortgage loan?

What is a conforming loan?

A conforming loan is a mortgage that meets the guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). If a mortgage meets these guidelines, it can be purchased by Fannie and Freddie and then sold to investors. These guidelines include a maximum loan amount and minimum borrower requirements.

The Federal Housing Finance Agency (FHFA) sets the maximum amount for a conforming loan. For 2023, the maximum loan amount is $726,200. For areas with a high cost of living, like San Francisco or New York City, loans can be up to $1,089,300 (150% of the maximum limit).

Conforming loans that meet these limits generally have lower interest rates and fees than nonconforming loans.

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Understanding Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are government-backed companies that guarantee and provide liquidity to the U.S. housing market. They do this by purchasing and securitizing conforming home loans and selling those securities to investors.

Brian Kimball, a senior mortgage advisor at Waterstone Mortgage, explained, “The federal government, via the FHFA, created and oversees Fannie Mae and Freddie Mac, which regulate a standard of guidelines, regulations and limitations, as well as [purchase] mortgage loans that other banks and lenders originate.”

Conforming loans are required to meet minimum requirements to make them safe investments for individuals and institutions, and Fannie Mae and Freddie Mac create mortgage-backed securities (MBSs) from these conforming loans. Fannie Mae purchases conforming mortgages from larger commercial banks, while Freddie Mac purchases them from smaller regional banks and credit unions.

By purchasing mortgages, Fannie Mae and Freddie Mac offer lenders liquidity and allow them to continue lending money. The mortgages are packaged together as MBSs, with up to hundreds or even thousands of mortgages forming a single investment vehicle.

Conforming loan limits and criteria

Conforming loans follow strict limitations set by the FHFA, Fannie Mae and Freddie Mac. The FHFA sets the maximum loan limits, and Fannie Mae and Freddie Mac set the borrower requirements.

Here are the conforming loan limits and criteria:

• Maximum loan amount: The FHFA has set the 2023 conforming loan limit to $726,200 in most areas. Borrowers in certain areas with a high cost of living can borrow up to 150% of the conforming loan limit, or $1,089,300. There are special provisions for Alaska, Hawaii, Guam and the U.S. Virgin Islands. Borrowers in those locations can also borrow up to $1,089,300.
• Maximum loan amount for multiunit properties: You can get a conforming loan for a property with up to four units. Here are the conforming loan limits for multiunit properties:
  • Two-unit property limit: $929,850
  • Three-unit property limit: $1,123,900
  • Four-unit property limit: $1,396,800
• Loan-to-value (LTV) ratio: A conforming loan has a maximum LTV ratio of 97%.
• Debt-to-income (DTI) ratio: A conforming loan has a maximum borrower DTI ratio of 45% in most cases.
• Credit score: Conforming loans require a minimum credit score of 620. Higher credit scores are required for borrowers with high DTIs and LTVs.

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Conforming vs. nonconforming mortgage

Conforming loans meet the criteria set by the FHFA, Fannie Mae and Freddie Mac. These loans have a maximum borrowing limit and set borrower criteria. The current conforming loan size limit is typically $726,200, with loans of up to $1,089,300 in certain areas.

“A nonconforming mortgage is one that either does not comply with the standardized regulations, guidelines and requirements and/or exceeds the maximum loan limit. A nonconforming mortgage could not be sold to Fannie Mae or Freddie Mac, and each nonconforming lender is required to create their own set of guidelines and limitations,” stated Kimball.

In most cases, it’s advantageous to get a conforming loan. You can put very little down, the interest rates may be lower, and there are typically fewer fees than with most other loan types. But if you need to borrow more than the allowed amount or need a non-traditional mortgage, getting a nonconforming loan may be your best choice.

Pros and cons of conforming mortgages

A conforming mortgage is the most common type of home mortgage, especially for first-time homebuyers and buyers purchasing single-family homes. But these loans aren’t suitable for every situation. Here are the pros and cons of using a conforming mortgage:

What to look for in a conforming loan lender

When shopping for a conforming loan lender, it’s important to consider a few things.

• Reputation: Good lenders typically have a stellar reputation. If you do research and find numerous complaints in online reviews and poor responses to disputes, it may be best to avoid the lender.
• Mortgage rates: While mortgage rates might be similar between most conforming mortgage lenders, it’s best to shop around. Even a 0.125% difference in your mortgage rate can save you thousands of dollars over the life of the loan.
• Fees: There are quite a few required fees with mortgages, but the amount lenders charge can vary significantly. Always shop around to find a lender with reasonable fees.
• Borrower requirements: While all conforming loans must meet minimum requirements set by the FHA, Fannie Mae and Freddie Mac, some lenders set their own requirements that are stricter than the minimum. Make sure you qualify for a lender’s requirements before applying for a loan.

Bottom line

A conforming loan is the most popular loan type available from lenders for single-family homes. With the backing of Fannie Mae and Freddie Mac, these loans typically offer lower interest rates and fewer fees than nonconforming loans. You might also qualify for a low down payment if you have a low income or are a first-time homebuyer.

Conforming loans aren’t available for particularly large mortgages, but they can be a great option for most homebuyers.