What Is a Conforming Loan?

Are you a homebuyer with good credit, say a FICO score of 620 or higher? Are you planning to buy a home, even one in the $500,000 to $750,000 range, or closer to $1 million in high-priced areas like Los Angeles, San Francisco, and New York counties? If so, don’t be surprised if mortgage lenders offer you a conforming mortgage loan. You won’t need to seek out or ask for a conforming loan by name. Government-backed organizations with very deep pockets have given lenders all the incentives they need to push these loans.

Before discussing what conforming loans are, how they work, and what they involve, let’s answer the most important question first: Why do lenders, borrowers, and investors like these loans? What are their advantages?

Lenders love conforming loans because they can sell them to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. This transfers risk from lenders to the GSEs and investors in the GSEs’ mortgage-backed securities (MBS). Selling a loan you originate reduces how much profit you can make from it when borrowers pay it off in full as agreed, no doubt. But locking in slightly reduced profit while transferring most of the risk to someone else — now, that’s a sweet deal if you’re a loan originator.

It’s hardly surprising, then, that the role of GSEs in the mortgage industry has been expanding apace for years. A 2001 Mercatus Center paper observed how the rate of growth of three GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan Banks — grew at double or triple the rate of the broader U.S. mortgage market from 1995 to 2000. In 2002, a Mises Institute article noted that this trend “has led to predictions that the GSEs will inevitably nationalize mortgage risk by acquiring virtually all domestic mortgages.”

Between then and now, of course, we had a financial crisis. Since crises frequently lead to government action, it’s hardly surprising that GSEs have continued to grow in importance. In 2019, the Federal Deposit Insurance Corporation (FDIC) observed that “The federal government now backs a majority of new mortgages either directly at origination through the FHA, the U.S. Department of Veterans Affairs (VA), or the USDA, or indirectly in securitization through Ginnie Mae or through the GSEs, including Fannie Mae and Freddie Mac.”

Opinions differ about whether the government’s growing involvement in mortgage financing is a good or bad thing. Some may even wonder if housing prices would be as high as they are now if government money and influence weren’t so ubiquitous. But whether they support or oppose the government’s growing involvement, prudent borrowers know better than to let politics keep them from getting the best mortgage deal they can. And that deal will very often be a loan backed by a government agency or GSE. For buyers with good credit, that will often mean a conforming loan.

Conforming loans offer several advantages to borrowers. Let’s look at some of them.

Because they are easy to sell, conforming loans reduce lender risk and promise greater liquidity. This means lenders will usually offer lower interest rates on conforming loans than on such non-conforming alternatives as jumbo loans. This is not a guarantee, however, as you can see from the chart below.

As this chart shows, the interest rate for jumbo loans (loans exceeding the conforming loan limit, discussed below) drop beneath conforming loan rates from time to time. The most recent data available at the time of this writing, shown at the far right of this chart, is for one of those times.

The same advantages that usually incline lenders to offer lower interest rates on conforming loans also make more lenders want to offer conforming loans to borrowers. As you seek mortgage offers from multiple lenders using SuperMoney’s advanced search tools, you can bet that, if you and the house you’re buying qualify, your preapprovals will include conforming mortgage loans.

Among the provisions of the Dodd-Frank Act is a requirement that conforming mortgage loans must adhere entirely to the consumer protection requirements of that Act (achieved through an amendment to the Truth in Lending Act). In effect, this means that they must fully comply with the regulatory dictates of the Consumer Financial Protection Bureau (CFPB).

For a time, this meant something a little different than perfect compliance with rules others followed. The CFPB maintained a “GSE Patch” that allowed some conforming mortgages to be deemed qualified mortgages (QMs) even though they did not meet all the QM requirements. For instance, the patch allowed a higher debt-to-income ratio (DTI) than the 43% then permitted for QMs. (The final DTI rule for QMs is less exact than a fixed percentage, taking more factors into account.)

The time of imperfect compliance has now passed. The two GSEs have announced they will not purchase newly originated loans that require the patch to rate as QMs. Now all conforming mortgages will also be un-patched qualified mortgages.

Since the goal of these regulations, and the design of qualified mortgages, is to ensure a high probability of repayment, borrowers who successfully land a conforming mortgage likely aren’t getting in over their heads. They can be confident that probability is on their side. Barring black swan events, the chances they will avoid default should be good.

Conforming mortgage loans are conventional mortgages. Like other conventional mortgages, they will require private mortgage insurance if you pay less than 20% down. If you do pay less and have to buy mortgage insurance, you can request to stop buying the insurance when your loan payments get your equity in the home to 20%.

Approval of this request is not guaranteed. If your increased equity is due more to an increase in home values than your mortgage payments, you’ll likely be asked to build more equity first. If the equity owes mostly to your mortgage payments, however, your request very often will be approved.

The requirements for conforming loans allow the purchase of buildings with up to four units. As well, they allow purchases of properties where you don’t plan to live. Rental properties and second homes will require more money down and won’t offer interest rates as low as a single-unit primary residence, though.

Mortgage-backed securities, typically identified by the acronym MBS, are bonds. Unlike traditional fixed-rate bonds, they usually pay out monthly rather than semiannually, pay both principal and interest, and pay a varying amount because this is how borrowers pay their mortgages.

MBS, also sometimes called mortgage bonds, differ from another popular bond investment, Treasury bonds. With MBS, you don’t have to wait for the bonds to mature to receive the principal. Whereas Treasury bonds pay out only interest before maturity, MBS pay out both interest and principal, mostly interest to begin with then more principal each month. Investing in MBS typically requires at least $10,000.

Most MBS are issued by government agencies or GSEs. The government agency best known for issuing these securities is Ginnie Mae (the Government National Mortgage Association, GNMA), part of the U.S. Department of Housing and Urban Development (HUD). This agency, which guarantees mortgage loans for such borrowers as first-time and low-income homebuyers, issues MBS that, like Treasury bonds, are officially backed by the “full faith and credit” of the U.S. government.

Freddie Mae, which specializes in mortgages originated by larger banks, and Freddie Mac, which focuses on mortgages from credit unions and smaller banks, also create and sell MBS. These MBS, however, are not officially backed by the “full faith and credit” of the U.S. government. Investors, therefore, should perceive these mortgage bonds as more risky than both Treasury bonds and Ginnie Mae MBS. In practice, though, government sponsorship causes many investors to think that there is little risk that the government will allow them to suffer catastrophic losses due to an adverse economic event like the 2007–8 financial crisis. Even though one motivation of the Dodd-Frank Act was to prevent future bailouts, many investors think of Fannie Mae’s and Freddie Mac’s mortgage bonds as “too governmental to fail.”

Now that you know why lenders, borrowers, and investors find these loans attractive, let’s look more closely at how conforming loans work. What limits and rules make them what they are are?

FHFA sets the conforming loan limit yearly. When prices rise in the housing market, FHFA raises the limit. If prices drop, FHFA maintains the prior year’s limit. The CLL actually comprises multiple conforming loan limits. These include a national baseline, an upper limit for areas with high-priced housing, specific limits for each county (or “county-equivalent area”) in the high-priced category, and a limit for states and territories permitted higher limits by statute.

In 2022, the FHFA national baseline conforming loan limit for single-unit properties (properties with one home) rose to $647,200.

In addition to the national baseline, the agency sets other conforming loan limits for specific areas. For instance, a higher limit applies in areas where the national baseline fails to cover 115% of the median home value. That percentage of the 2022 baseline of $647,200 is $744,280‬. So, any county or “county equivalent” with a median home price over $744,280 is a high-priced area for 2022.

In these areas, the limit can rise no higher than 150% of the baseline. That makes the 2022 upper limit $970,800. Through the end of 2022, that’s the maximum conforming loan limit for any high-priced area.

The agency sets a specific limit for each county or county equivalent in the U.S., providing a spreadsheet with limits for over 3,000 high-priced jurisdictions.

As you can see from the FHFA map below, the high-priced areas, though numerous, cover a relatively small area of the country.

As it turns out, some of what look like high-priced areas on the above map actually have higher limits for a different reason than prices. By statute, different loan limits apply to Alaska, Guam, Hawaii, and the U.S. Virgin Islands. The 2022 single-unit property loan limit for these areas is $970,800.

A mortgage has to do more than fall below the current CLL to qualify as conforming. It also has to meet the following requirements.

The FHFA requires that conforming loans finance the purchase of “single-family homes.” But what the FHFA means by that phrase isn’t what most of us would naturally assume. FHFA means a residential property with up to four units. Since a single family could live in each unit, the property still qualifies as “single-family homes.” You just can’t buy large apartment complexes or commercial real estate.

So, if you plan to buy a four-unit apartment building and live in one unit while renting three out, you may still be able to land a conforming loan. You might even be able to get a conforming mortgage if you’re buying an investment property where you don’t plan to live, but qualifying will be more difficult.

To show they will probably be able to pay back their loans, borrowers and their loans must satisfy certain criteria. Here are some typical numbers for one-unit properties purchased as primary residences:

You’ll also have to show some appealing credit history, show that you’ve worked and earned sufficient income for a couple of years, and be able to provide the sorts of identity, residence, and income documentation you’d have to provide for any other home loan.

While properties with up to four units can also qualify for conforming loans, borrower qualifications will not exactly match those for single-unit primary residences. For instance, Fannie Mae’s maximum LTV for a four-unit, principle-residence property is 75%, not 97%. That means you’ll need a 25% down payment. If you make that an investment property instead of a principal residence, the maximum LTV drops to 70% (30% down payment).

DTI and FICO requirements similarly vary, in terms of one another as well as in terms of the type of loan and property. For a tabular overview of the differing requirements for various borrowers, loans, and properties, see Fannie Mae’s Eligibility Matrix.

Note that these are just the minimums usually needed to satisfy Fannie Mae and, with some variation, Freddie Mac. Your originating lender may impose requirements not mandated by these GSEs.

Rather than trying to gain an exhaustive knowledge of conforming loans on your own, you’ll be best served by finding a lender to work with. Whether your financial situation makes a conforming conventional mortgage or a non-conforming loan, conventional or otherwise, your most viable option, SuperMoney’s search tools and unbiased real-customer reviews can help you find the best lender and loan for your unique situation.

What if you or the property you’re buying can’t meet conforming loan requirements? What are your options?

Though a conforming mortgage loan does have government backing, this backing is indirect, achieved through government sponsorship of secondary mortgage buyers and securitizers. Because it is indirect, it “doesn’t count” against these loans’ status as privately originated, conventional loans.

Since this second-degree government backing is what makes conforming loans appealing, we shouldn’t be surprised if the most advantageous non-conforming loans also have government backing. And since they don’t need to be conventional, these alternatives can receive their government backing directly.

The main government-backed loans worth considering are FHA loans, VA loans, and USDA loans.

These loans, insured by the Federal Housing Administration, are easier to get than conventional loans. You can land one of these with a credit score that could never get you into a conforming loan. If you can pay 10%, you could qualify with a credit score as low as 500. If you can only manage 3.5% down, you still could qualify with a credit score of around 580. One type of FHA loan is a graduated-payment mortgage, which allows lower monthly payments in the early months or years of the loan.

Guaranteed by the U.S. Department of Veterans Affairs, these mortgages are available to certain members of the military, veterans, and eligible family members. Aside from military affiliation, their requirements closely resemble those for FHA loans. Like FHA loans, VA loans are easier to qualify for than conventional loans, including conforming loans.

The U.S. Department of Agriculture has several housing programs, including its Single-Family Housing Direct Home Loans program. USDA loans are available to lower-income homebuyers in qualified rural areas. In addition to flexible credit-score requirements, these loans permit borrowers to buy homes without a down payment.