A conventional conforming loan is a specific type of conventional mortgage that meets the guidelines and conforming loan limits set by the Federal Housing Finance Agency (FHFA). These loans adhere to the federal conforming loan limits and eligibility criteria established by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. Because these agencies purchase such loans, they reduce risk for private lenders, enabling more mortgage loans to be funded in the secondary market.
Most mortgage lenders primarily offer conventional conforming loans, providing borrowers with options for fixed rate loans or adjustable rate mortgages. The most common term lengths for these loans are 15 and 30 years, offering flexibility to suit different mortgage options and personal finance goals.
To qualify as a conventional conforming loan, a mortgage must meet specific standards related to both the loan and the borrower. These include:
Conventional conforming loans offer borrowers the advantage of lower interest rates compared to non conforming loans or jumbo loans. Because these loans conform to Freddie Mac guidelines and are eligible for purchase in the secondary mortgage market, lenders can offer more competitive rates and favorable payment requirements, helping borrowers avoid mortgage insurance in some cases.
Understanding these loan limits and requirements is crucial for navigating mortgage options and ensuring eligibility for conventional conforming loans, which remain a popular choice for many homebuyers seeking fixed interest rate or adjustable rate mortgages with manageable monthly payments.
Understanding these pros and cons can help borrowers decide if a conventional conforming loan aligns with their financial situation and homebuying goals.
While a conforming loan strictly adheres to the Federal Housing Finance Agency’s (FHFA) standards and conforms to the established conventional conforming loan limits, a nonconforming loan does not meet these criteria. A prominent example of a nonconforming loan is a jumbo loan, which finances properties exceeding the maximum loan limits set by the FHFA for a given area. Nonconforming loans often cater to borrowers who may not qualify for conforming loans due to factors such as a lower credit score, insufficient down payment, or unique financial circumstances like a history of bankruptcy.
These nonconforming loan options, including jumbo loans and other government-backed loans that fall outside conforming loan limits, typically have different loan limits, underwriting guidelines, and may carry higher interest rates compared to conventional conforming loans. Unlike conforming loans, which are eligible for purchase by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac and are packaged into mortgage backed securities (MBS) for sale in the secondary market, nonconforming loans are often retained by lenders or sold to private investors.
Borrowers considering nonconforming loans might find these options through multiple lenders, including private mortgage lenders and credit unions, or through online platforms like Rocket Mortgage. While nonconforming loans can provide flexibility for financing higher-priced homes or unique property types, they usually require higher down payments and may have an interest only period or adjustable rate mortgage features to accommodate borrower needs.
Understanding the distinction between conforming and nonconforming loans is essential for navigating mortgage options effectively. Conventional conforming loans offer the advantage of lower interest rates and more standardized underwriting, making them accessible to borrowers with higher credit scores and moderate down payments. In contrast, nonconforming loans serve borrowers who need financing beyond the baseline loan limit or who have credit challenges, providing alternative paths to homeownership despite stricter qualification criteria.
Both conforming loans and conventional loans are types of private mortgage loans that are not insured or guaranteed by government agencies such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). However, there is a key distinction between the two: a conforming loan specifically meets the eligibility criteria and loan limits established by the Federal Housing Finance Agency (FHFA), making it eligible for purchase by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
In essence, all conforming loans fall under the broader category of conventional loans, but not all conventional loans qualify as conforming loans. Conforming loans must adhere to strict guidelines regarding loan amount limits, borrower credit scores, debt-to-income ratios, and other underwriting standards set by the FHFA and the GSEs. Conventional loans that do not meet these criteria are considered nonconforming and may include jumbo loans or other specialized mortgage products.
Understanding this difference is important for borrowers because conforming loans typically offer more favorable terms, including lower interest rates and more competitive down payment requirements, due to their eligibility for purchase by Fannie Mae and Freddie Mac. Conventional loans outside the conforming parameters often carry higher interest rates and stricter qualification standards, reflecting the increased risk to lenders.
Therefore, when evaluating mortgage options, borrowers should consider whether a conventional conforming loan aligns with their financial situation and homebuying goals, as it often provides a more accessible and affordable path to homeownership compared to nonconforming conventional loans.
Conforming loan limits are established annually by the Federal Housing Finance Agency (FHFA) to reflect fluctuations in the housing market, including both increases and decreases in home prices. This annual adjustment ensures that the baseline loan limit keeps pace with changes in average residential real estate values, enabling typical homebuyers to continue qualifying for conventional conforming mortgages despite market shifts.
By recalibrating these limits each year, the FHFA helps maintain accessibility to affordable mortgage financing for a broad segment of borrowers. This process accounts for regional variations in housing costs, with higher limits set in certain high-cost areas under special statutory provisions. The adjustments are based on data from the FHFA’s House Price Index, which tracks the year-over-year changes in home prices across the country.
This dynamic approach to setting conforming loan limits supports the stability and liquidity of the mortgage market by allowing government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac to purchase loans that reflect current market conditions. As a result, lenders can offer competitive interest rates and favorable terms to borrowers, promoting homeownership opportunities nationwide.
The practice of annually adjusting conforming loan limits was formalized under the Housing and Economic Recovery Act (HERA) of 2008, which established a permanent formula for these adjustments. Since the inception of conforming mortgage products in 1980, loan limits have generally increased in response to rising home values, with occasional exceptions during market downturns. This mechanism ensures that the conforming loan limits remain relevant and effective in meeting the financing needs of homebuyers as housing markets evolve over time.
Here are a few suggestions you can take to help you get the best conforming loan for your circumstances:
As soon as possible, review your credit report and history at AnnualCreditReport.com. Carefully examine your reports for outdated information or inaccuracies. Be sure to dispute any errors you find, as even small mistakes can negatively impact your credit score.
Prepare all necessary paperwork ahead of time to streamline the mortgage application process. Although lenders can access much of your financial information directly from banks and the IRS, it’s still wise to have documents like pay stubs, bank statements, retirement account details, W-2 forms, and tax returns readily available.
Conventional conforming loans play a vital role in making homeownership accessible and affordable for many borrowers. By adhering to the loan limits and guidelines set by the Federal Housing Finance Agency and government-sponsored enterprises like Fannie Mae and Freddie Mac, these loans offer competitive interest rates, flexible terms, and lower down payment requirements. Understanding the distinctions between conforming and nonconforming loans, as well as the annual adjustments to loan limits, empowers borrowers to make informed decisions aligned with their financial goals. Whether you are a first-time homebuyer or looking to refinance, conventional conforming loans remain a reliable and popular option in today’s mortgage market, providing stability and opportunities for a wide range of homebuyers.
Orion's experienced brokers know that conventional conforming loan limits (think Freddie Mac and Fannie Mae, aka the GSEs, or Government Sponsored Enterprises) are officially announced right around Thanksgiving to Orion and the rest of the industry. But Orion's management and AEs feel that it is important for our broker clients to know what, and why, they are.
Your client needing a mortgage can benefit from easier underwriting standards and possibly a lower rate from a high-balance conforming mortgage instead of a “jumbo” mortgage. Higher loan limits enable your clients to afford a higher priced home, or the same priced home with a smaller down payment. This also has the effect of putting upward pressure on home prices or dampening any slowdown in prices.