Conforming vs. Non-conforming Loans: What Are the Differences?

Written by Elijah BishopUpdated: 28th Dec 2021
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Conforming loan? Non-conforming loan? If you’re in the market for a new mortgage, you might get baffled by these mortgage terms.

While this mortgage jargons may seem like an added layer of confusion, it can help you find the right mortgage for your situation.

That said, there are several significant differences between these two types of loans available.

And if you’re trying to secure a mortgage, you need to understand these differences before clearly making a loan purchasing decision.

Don’t worry. In this article, we’ll unravel the differences between conforming and non-conforming loans. Keep scrolling to learn more.

Understanding Conforming Loans

A conforming loan is a type of loan that finances the purchase of real estate. A loan is said to be conforming if it has two primary characteristics. These characteristics include:

  • It meets the underwriting requirements set by Fannie Mae and Freddie Mac, two of the government-sponsored enterprises that buy mortgages. However, these two agencies can only buy mortgages that conform to their guidelines. Hence, the advent of the term ‘conforming.’
  • It is equal to or lower than the conforming loan limits set for each county by the Federal Housing Finance Agency (FHFA) each year.

With this information in mind, let’s take a closer look at conforming loans.

>> More: Best Mortgage Lenders

Conforming Loan Requirements

You’ll need to meet the following requirements to qualify for a conforming mortgage loan:

  • Minimum credit score: 620
  • Maximum loan limits: Your loan amount must be within the approved FHFA loan limit. In 2021, the conforming loan limit is $548,250 in most areas. But in some high-cost regions like Alaska, Hawaii, New York, the maximum conforming loan limit can go as high as $822,375. You can review your county or state limits here.
  • Maximum debt-to-income ratio: 43%
  • Minimum down payment required: At least 3%, but you may have to pay for private mortgage insurance since you’re putting less than 20% down.

Conforming Loan benefits

  • Since conforming loans do not have strict qualification requirements, it is pretty easy for borrowers to qualify for them. Conforming loans often have a low-down payment and credit score requirements when compared to non-conforming loans.
  • Conforming loans typically offers one of the lowest interest rates, especially for borrowers with an excellent credit score.
  • Conforming loans are offered by many lenders, allowing you to compare services and prices.
  • Conforming loans have standardized guidelines meant to protect the borrower and lender from poor lending practices.

Conforming loan drawbacks

  • Your DTI ratio must meet the specified conforming loan standard. Under conforming loan, the maximum DTI ratio is typically 36% but can go as high as 50% if you have an excellent credit score or down payment
  • Your dream home could be priced above the conforming loan limit in your county, especially if you’re in a higher-priced market.

Understanding Nonconforming Loans

Non-conforming loans are mortgage loans that do not conform to the guidelines set by Fannie Mae and Freddie Mac.

Non-conforming loans commonly include jumbo loans (those beyond Fannie Mae and Freddie Mac loan limits) and government-backed loans like VA, FHA, or USDA loans.

For example, John wants to buy a one-unit home in Cobb County, Georgia. The house he plans to buy costs around $650,000.

John plans to make a down payment of 20% – or $130,000 – and pay for the remaining $520,000 using a home loan.

Because this loan amount exceeds the 2021 conforming loan limit for Cobb County, John would need to get a non-conforming jumbo loan to buy this home.

Generally, a non-conforming loan does not conform to the credit score requirement, loan size, and debt-to-income ratio set by the FHFA. For example, most commercial loans are non-conforming due to their loan size.

Non-Conforming Loan Requirements

Unlike conforming loans, the requirements associated with a non-conforming loan vary across lenders and the type of mortgage you apply for.

For instance, the loan requirements for a VA loan will be quite different from that of a jumbo loan.

However, both loans are still considered non-conforming loans. Below are some of the major requirements:

  • Minimum credit score: 580
  • Maximum loan limits: Varies by program and lender
  • Maximum debt-to-income ratio: Varies by program and lender
  • Minimum down payment required: Varies by program and lender, but you may be more likely to be approved with a down payment of at least 20%.

Non-conforming Loan Benefits

  • You can borrow a larger amount of money. If you qualify for a jumbo loan that exceeds Fannie Mae and Freddie Mac limits, you can borrow to buy a more expensive home.
  • Depending on the loan option, you might be able to buy different types of property than you could with a conforming loan.
  • You might be able to get a non-conforming loan if you have a negative mark on your credit, like a recent bankruptcy.

Non-conforming Loan Drawbacks

  • They are offered by fewer lenders, which may limit your ability to shop around
  • It may come with a higher interest rate
  • Have less standardization from lender to lender. So, you should expect to face poor lending practices and unexplainable lender fees.

What Are the Differences Between a Non-conforming and Conforming Loan?

While there are other types of home loans, conforming and non-conforming mortgages are the most common ones available to the average home buyer.

A conforming loan meets the guidelines to be sold to either Fannie Mae or Freddie Mac, two of the largest mortgage buyers in the US.

Non-conforming loans are those that do not conform to those guidelines, so Fannie Mae or Freddie Mac can’t purchase them.

In general, all mortgages fall into two broad categories ─ conforming or non-conforming.

Understanding the differences between these loans can help you make the right mortgage decision. In the following section, we will highlight some of these differences using certain factors.

Loan Limits

The first significant difference between a conforming and non-conforming loan is the loan limits. Conforming loans have maximum loan limits set by the FHFA.

Currently, the loan is set at $548,250 for a single-family home in most areas in the US Although, it is still possible to borrow as high as $822,375 in places with high home value.

Non-conforming jumbo loans, on the other hand, do not have a maximum loan amount limit in place.

Credit Score

To get a conforming loan, you must meet the credit requirements set by Fannie Mae and Freddie Mac.

For conventional loans, Fannie Mae and Freddie Mac generally require a credit score of 620 and above.

On the other hand, government-backed non-conforming loans like FHA loans typically require a lower credit score than conforming loans.

>> More: Differences Between FHA and Conventional Loans

Debt-to-income ratio

Conforming loans often require a DTI ratio of less than 50%. In terms of DTI ratio, non-conforming loans vary across online mortgage lendersand loan types.

Non-conforming loans like jumbo loans require a lower DTI ratio, while government-backed non-conforming loans like FHA loans may allow you to get a loan with a higher DTI score.

Loan-to-value ratio

Your loan-to-value ratio and down payment go hand-in-hand. For a conforming loan, you’ll need an LTV of no more than 97%, which equals a minimum down payment of 3%.

For non-conforming loans, the LTV ratio varies across lenders and loan programs. An FHA loan may require a 3.5% down payment, while a jumbo loan may ask for up to 20% down.

When Does a Conforming Loan Make Sense?

A conforming loan is preferable if:

  • Low-interest rate
  • You have a great credit score
  • You want to purchase a home below your county loan limit
  • You want to avoid the payment of PMI by putting 20% or more.
  • You want a readily available loan option

Conforming loans are not the same as conventional loans. Conventional loans refer to all non-government-backed loans. However, most conventional loans are conforming loans.

When Does a Non-Conforming Loan Make Sense?

You should consider a non-conforming loan if:

  • You are okay with a high-interest rate
  • You have a large cash reserve
  • You want a loan amount beyond the conforming loan limit
  • You have negative remarks on your credit report
  • You want to purchase a type of property that cannot be financed with a conforming loan
  • You have a poor credit score (FHA and VA loans have one of the lowest credit score requirements)

Are Conforming Loans better than Non-conforming Loans?

If you want to purchase a more expensive house beyond the loan limits approved by Fannie Mae and Freddie Mac, then a non-conforming jumbo loan will be your best bet.

But if you want a low-interest mortgage with less stringent requirements, then you may want to consider a conforming loan.

That said, before getting either a conforming or non-conforming loan, it is advisable that you work on your credit score, save for a higher down payment, and speak to an experienced mortgage advisor for proper guidance.

Bottom Line: Conforming vs. Non-Conforming Loans

While these loans may have their differences, they are all mortgage loans. Both conforming and non-conforming loans have their advantages and disadvantages.

When deciding on which loan to choose for your next home purchase, you should base your decision on your down payment, required loan amount, debts, credit score, and financial situation.

Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.