A conforming loan is a conventional loan that meets the loan limit guidelines set by the Federal Housing Finance Agency (FHFA).
How Conforming Loans Work
Mortgage loan guidelines exist to prevent lenders from lending money to borrowers who can’t afford their loan payments. They help protect a borrower from taking on more debt than they can manage, and they also protect the lender from taking on too much risk.
The conventional loan borrowing guidelines are made by the government-sponsored enterprises Fannie Mae and Freddie Mac. They buy loans from lenders that meet these guidelines, serving as an investor in the mortgage market. This gives lenders a constant flow of money, so lenders can continue lending. However, Fannie Mae and Freddie Mac only buy conforming loans.
For a conventional loan to be considered a conforming loan, the loan amount must be lower than the limit set by the Federal Housing Finance Agency (FHFA).
For example, let’s say you want to buy a one-unit home in Wayne County, Michigan for $250,000, and you qualify for a conventional loan of $200,000. Your loan of $200,000 is less than the loan limit of $548,250, making it a conforming loan.
The 2021 loan limit for a one-unit property in the lower 48 states is $548,250. In high-cost areas, like Alaska and Hawaii, the 2021 loan limit for a one-unit property is higher at $822,375.
Benefits of a Conforming Loan
Having a loan that conforms with guidelines set by Fannie Mae and Freddie Mac has its advantages.
- Conforming loans typically offer lower interest rates to borrowers with high credit scores, making them a great option if your goal is to get a low monthly payment.
- Conforming loans are offered by many different lenders, giving you the opportunity to compare services and prices.
- Conforming loans have standardized guidelines meant to protect the borrower and lender from poor lending practices.
Conforming Loans Vs. Non-Conforming Loans
A conventional loan that exceeds the loan limit is known as a non-conforming loan. Nonconforming loans are also those backed by the government like FHA, USDA and VA loans.
For example, let’s say you want to buy a one-unit home in Wayne County, Michigan. The home is valued at $800,000, and you qualify for a conventional loan of $600,000. Your loan of $600,000 is more than the 2021 loan limit of $548,250, making it a non-conforming loan.
The down payment and interest rate may or may not be higher on a non-conforming loan. The borrower eligibility guidelines for non-conforming loans vary across lenders.
Conforming loans are typically preferred by those seeking to avoid paying a high-interest rate or long-term mortgage insurance payments. Although you have to pay mortgage insurance for a conforming loan if your down payment is less than 20%, it can eventually be removed once you’ve built up 20% equity in the home.
If you’re unsure whether you qualify for a conforming loan, or still have questions and would like to talk to someone directly, we’re here to help! Speak with a Home Loan Expert by calling us at (833) 230-4553.