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Buying a home is a big financial decision, and searching for the right loan can feel like a daunting task. As you search for your mortgage options, you’re likely to come across some new terms, like conforming loans and non-conforming loans.
What are the differences between the two? There are a lot. Let’s take a closer look at the differences between conforming and non-conforming loans and which one might be better suited to your needs.
The difference between conforming and non-conforming loans
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- Conforming Loan
- Conforming loans are a type of mortgage that adheres to financial and funding boundaries established by the Federal Housing Finance Agency (FHFA) and therefore is eligible to be resold by the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.
- Non-conforming loans
- Non-conforming loans do not comply with standards set by the FHFA and therefore cannot be sold to Fannie Mae or Freddie Mac.
The two types of mortgages, conforming and non-conforming loans, differ in many ways, including:
- Loan LimitConforming loans adhere to loan size limits set annually by the FHFA and comply with the Dodd-Frank Act and the Consumer Financial Protection Bureau’s underwriting standards. This compliance allows lenders to sell loans to Fannie Mae and Freddie Mac, who buy or guarantee most of the mortgages in the U.S. Non-conforming loans, on the other hand, do not comply with these size limits and regulations.
- interest rate: Conforming loans, which are more common than non-conforming loans, generally offer relatively lower interest rates and therefore relatively lower lifetime borrowing costs.
What is a conforming loan?
What is a conforming loan? Compliant You must adhere to guidelines set forth by the FHFA and other federal agencies, many of which were put in place in response to the subprime mortgage crisis of the mid-2000s. To qualify for a conforming loan, you must meet several criteria, including the amount you borrow.
Conforming loans exist so that the government-sponsored enterprises (GSEs) Fannie and Freddie can purchase loans with the assurance that they meet a standardized set of requirements. These loans are bought and sold in the secondary mortgage market, reducing the risk that lenders take in originating the loans and serving as a source of income for lenders, allowing them to offer mortgages to new borrowers and making it easier for the public to borrow money to buy a home.
Pros and Cons of Conforming Loans
Strong Points
- A lower interest rate means lower monthly payments and less money spent over the life of the loan.
- A standardized underwriting and approval process could result in fewer surprises when applying for a loan.
- In times of crisis, certain protections may be available, such as the foreclosure moratoriums enacted by the federal government during the pandemic.
Cons
- If you have a low income, low credit score and a high debt-to-income ratio (DTI), it may be difficult to obtain.
- If you are buying a luxury home or a standard home in a premium area, you may not have enough money.
What is a non-conforming loan?
A mortgage that doesn’t meet the requirements for a conforming loan is considered a non-conforming loan. Jumbo loans are a common type of non-conforming loan. Jumbo loans exceed the maximum loan limit for your area. However, a loan can be non-conforming for reasons other than the size of the loan. For example, government-insured loans such as FHA, VA, and USDA loans are non-conforming loans.
Compared to conforming loans, non-conforming loans have a much greater variety of loan types and features. It is important to keep in mind that non-conforming mortgages often have higher interest rates than conforming loans. Additionally, the process of obtaining a non-conforming loan is quicker and requires less paperwork than the process of obtaining a conforming loan.
Non-conforming loan requirements
If you’re planning on getting a jumbo loan, lenders may require a high credit score, high cash reserves or assets, and/or a low debt-to-income ratio (DTI ratio). Additionally, plan on making a down payment of 10 to 30 percent. The exact amount will vary depending on the lender.
There are three common reasons why borrowers don’t qualify for a conforming loan:
- Loan Amount: In 2024, if you’re borrowing more than $766,550 (in most parts of the U.S.) or $1,149,825 (in expensive areas like Hawaii), you’ll need a non-conforming loan. If you’re borrowing less than that, a conforming loan will suffice. These numbers will change in 2025, so check back for updates when the new limits are announced at the end of the year.
- Credit score: If you have credit issues and your FICO score is below 620, you may not qualify for a conforming loan. For borrowers with low credit scores, mortgages issued by the Federal Housing Administration (FHA) are a popular alternative to non-conforming loans. FHA loans can be obtained with a credit score up to 580 (or 500 with a higher down payment than the standard 3.5%). The downside is that mandatory mortgage insurance premiums (MIPs) can increase the cost of an FHA loan.
- High DTI ratio: If you have a high DTI ratio, it means your monthly payments are a fairly high percentage of your monthly income — typically over 45%. If your debt amount is outside of conforming loan territory, you may still be able to get an FHA mortgage or a non-conforming loan, also known as a non-qualified mortgage or non-QM mortgage.
Pros and Cons of Non-Conforming Loans
Strong Points
- It gives you more options by allowing you to buy in more expensive areas or homes that don’t qualify for conforming loans.
- More accessible to borrowers with credit problems, including bankruptcy
- Increased loan limits
Cons
- They can be hard to find and hard to compare because there are fewer lenders offering them due to the higher risk.
- Can be more expensive than a conforming loan due to higher interest rates and additional fees
- Potential lack of conforming loan protections regarding borrowing limits, loan terms and delinquencies
Conforming vs. Non-Conforming Loans: Which is Best for You?
Conforming Loan | Non-conforming loans |
|---|---|
| In most parts of the US the amount must be $766,550 or less (up to $1,149,825 in certain high-cost housing markets) | There is no specific limit |
| Best for those with good credit and low debt-to-income ratios | If you have insufficient creditworthiness or unusual financial circumstances |
| You may be able to qualify with a small down payment | Often requires a large down payment |
| We offer the most competitive interest rates | Usually comes with a higher interest rate |
| More widely available, offered by most lenders | Not very common, so additional shopping may be required |
If the price of the home you want is within the conforming loan limit and your credit history meets the qualification requirements, you may be better off applying for a conforming loan, which generally has lower interest rates and lower down payment requirements than a non-conforming loan.
A non-conforming loan is a good choice if you are buying a more expensive property and need to borrow a larger amount. It is also a better choice if you have a negative credit history or don’t meet the qualification criteria for a conforming loan. However, while non-conforming loans have some advantages, they also have disadvantages, such as potentially higher interest rates.
You can contact banks and other lenders directly to inquire about the types of non-conforming loans they offer. Another option worth considering is finding a mortgage broker that specializes in non-conforming loans.
Regardless of what type of loan is right for your situation, do your research before choosing a mortgage lender. Request loan quotes from multiple lenders. Then compare interest rates and loan terms to find the best option for you.
Additional reporting by David McMillin
