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Differences Between Nonconforming and Conforming Loans

Conforming loans are backed by Fannie Mae and Freddie Mac, and can’t exceed FHFA loan limits (typically $484,350). Nonconforming loans can be bigger but may cost more.
Sept. 12, 2019
Finding the Right Mortgage, Mortgages
Top Differences Between Conforming and Non-Conforming Loans Story
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What is a conforming loan?

Conforming loans are mortgages that conform to financing limits set by the Federal Housing Finance Agency (FHFA) and meet underwriting guidelines set by Fannie Mae and Freddie Mac, whereas nonconforming loans do not. Conforming and nonconforming loans are both types of conventional loans.

Fannie Mae and Freddie Mac are the government-sponsored entities that buy conforming loans. These behind-the-scenes companies provide a secondary market for mortgages, allowing lenders to package loans into investment bundles and sell them so they’re able to lend again.

To get a conforming loan — which is a good thing — you’ll want to buy a house that puts you under the conforming loan limit in your area.

As part of their structure, Fannie and Freddie are legally bound to purchase various types of mortgage loans under a certain value, known as the “conforming loan limit.” The FHFA sets the national conforming loan limit. For 2019, the limit is $484,350 — but it can be more in some high-cost markets. For example, conforming loans can top out at $726,525 in Alaska, Washington, D.C., and metro areas in other high-demand housing markets. Conforming loan limits are even higher in some cities in California and Hawaii.

So, to get a conforming loan — which is a good thing — you’ll want to buy a house that puts you under the conforming loan limit in your area. Use the tool below to find out what that limit is.

Benefits of a conforming loan:

  • Often easier to qualify for.
  • Can have a lower mortgage interest rate.
  • May offer a lower down payment.
  • Can allow some wiggle room with your credit score.

See conforming loan limits

» MORE: How much house can you afford?

What is a nonconforming loan?

This one is easy: Loans above the conforming loan limit are known as “jumbo” loans. The terms and conditions of these nonconforming mortgages can vary widely from lender to lender, but the mortgage rates for jumbo loans are typically higher because they carry greater risk for a lender.

Nonconforming loans often mean:

  • A minimum down payment of 20% or more.
  • Stricter credit-qualifying criteria, with more scrutiny of your credit profile and income.
  • A higher mortgage interest rate.

» MORE: What you need to know about jumbo loans

Other nonconforming loans

Mortgage size is just one measure of nonconforming loans. Other factors can lead to the nonconforming loan label, including:

  • Credit history issues or a low credit score.
  • Too much debt in relation to how much you earn (your debt-to-income ratio).
  • A down payment less than 20% of the home’s value, which affects your loan-to-value ratio.

» MORE: Calculate your loan-to-value ratio

One important note: A lower down payment doesn’t always trigger a nonconforming loan. In fact, both Fannie Mae and Freddie Mac have 97% low-to-value mortgage products. With these loans, you can make a 3% down payment and still get a conforming loan.

» MORE: Calculate your loan-to-value ratio

If you can’t qualify for a conforming mortgage, you might want to apply for an FHA loan. The Federal Housing Administration helps potential homeowners qualify for a mortgage by guaranteeing a portion of the loan. However, that backing will cost you additional fees.

Find conforming mortgage lenders

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