Differences Between Conforming Loans and Non-Conforming

Finding the Right Mortgage, Mortgages
Top Differences Between Conforming and Non-Conforming Loans Story

This will be a little peek into the inner workings of a home loan. It’s kind of like looking under the hood of a car. Lots of belts, hoses, metal and plastic — and who knows what all that’s about? But knowing a little something about the types of mortgages out there will help you get the best terms you can on the largest purchase of your life.

Conforming loans

The government-sponsored entities that drive the home loan market are known as Fannie Mae and Freddie Mac. These behind-the-scenes organizations provide a secondary market for mortgages — allowing lenders to package loans into investment bundles, sell them and lend again.

As part of their structure, they are legally bound to purchase various types of mortgage loans under a certain value, known as the “conforming loan limit.” The Federal Housing Finance Agency sets the national conforming loan limit, which is $424,100 in 2017 — but it can be more in some high-cost markets. For example, conforming loans can top out at $636,150 in Alaska, Washington, D.C., and metro areas in other high-demand housing markets. 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.

» MORE: How much can you afford?

Jumbo home loans

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

The down payment for these types of loans are 20% or higher. Lenders typically have stricter qualifying criteria for jumbo loans, and you can expect more scrutiny of your credit profile and income.

» MORE: What you need to know about jumbo loans

Other non-conforming loans

Mortgage size is just one measure of non-conforming loans. Other factors can trigger the non-conforming loan label, and can include:

  • 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).

One important note: A lower down payment doesn’t always trigger a non-conforming loan. In fact, Fannie Mae has a 97% loan-to-value program for first-time homebuyers. As long as that program is in effect, you can make a 3% down payment and still have your loan classified as conforming. Fannie Mae also offers a 5% down program for non first-timers.

» MORE: Loan-to-value calculator

What it means to you

A conforming loan usually offers a lower interest rate and lower fees. Lenders like them because they can sell the loan, which frees up capital and lets them make more loans.

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. Unfortunately, that support will cost you additional fees.

More from NerdWallet
Best mortgage lenders for jumbo loans
Compare mortgage rates
Get our daily rates email

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

This post was updated Dec. 21, 2016. It originally published May 26, 2015.


Image via iStock.