By Matt Allen
Vice President, Portfolio Lending (NMLS #415037)

What is a Conforming Loan?

Apr 03, 2020

  • Mortgages
  • Conventional Loan
  • Home Loans

Most borrowers turn to a conforming loan when purchasing a home. These loans meet the guidelines of the two government housing agencies, Fannie Mae and Freddie Mac. As a result, a conforming loan's eligibility, pricing, and features are more standardized. You may receive a lower interest rate and more reasonable loan terms than you would find on a non-conforming loan.

What Are Non-Conforming Loans?

These types of loans are often known as “jumbo” loans. They don’t fall under Fannie Mae and Freddie Mac's standards and are not backed by government entities. They carry more risk to the lender.

Non-conforming loans are above the loan limits of conforming loans. The loan limit can vary by area and usually changes annually. High-demand housing markets such as Alaska and Washington D.C. have higher limits due to the cost in the market. 

These loans often require a minimum down payment of 20%, stricter credit qualifying criteria, higher income requirements, and higher interest rates.

Benefits of a Conforming Loan

Conforming loans offer many benefits. The main advantage is that conforming loans offer lower interest rates than their counterparts. You pay less over the life of the loan in the form of a monthly mortgage and interest. Lenders carry less risk with conforming loans since government agencies such as Freddie, Fannie, and Veteran’s Affairs will back the loans in case of a default.

Lenders may be more accommodating regarding factors such as your income and debt-to-income ratio. When qualifying for a conforming loan, there could also be more wiggle room with your credit score. Your down payment can generally fall below 20%, and in some cases, there is no down payment.

Qualifications for a Conforming Loan

Specific requirements must be met to qualify for a conforming loan, which may vary by lender. Primary factors determine if you are eligible for a conforming loan. These factors include:

Credit score – The higher your credit score, the more likely you’ll be approved for a conforming loan. It could even lower the down payment requirement for the type of loan you are requesting.

Loan-to-value ratio – This ratio is the amount you wish to borrow against the value of the home you are purchasing. For example, if your loan-to-value ratio is 80 percent, you can only borrow up to 80 percent of the home’s value.

Cash reserves – The requirement that defines the cash assets that you must have in reserve will vary by the type of loan. In some cases, you will have to have at least six months in reserve.

Debt-to-income ratio – The ratio of your total monthly debt payments against your before-tax income is considered your debt-to-income. This monthly debt payment will include your mortgage payment.

The number of units – Single-family, two-unit, and three- or four-unit properties- all have different requirements.

If you have any questions about securing a conforming loan, call the experts at NASB at 855-465-0753.