Conforming vs. Non-conforming loan. What’s the difference?

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Explore the differences between Conforming and Non-conforming loans with this helpful guide.

What is a conforming loan?

A Conforming loan is a non-government loan that “conforms” to requirements set by the Federal Housing Finance Agency and meets the funding criteria of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).

Characteristics of a Conforming loan

Conforming loans are popular because they have clearly defined guidelines, such as the size of the loan and options for financing. Let’s take a look at five features of these types of loans.

  1. Loan limits – The loan amount may not exceed county limits. In 2019, the baseline loan limit for most counties across the U.S. is $484,350. More expensive markets, such as Hawaii and Alaska, have conforming loan limits as high as $726,525.1 Download conforming loan limits for all counties on loanlimits.org.
  2. Down payment – Borrowers can qualify for financing up to 97% of the purchase price, meaning most lenders require a minimum 3% down payment. For a Conforming loan higher than the baseline loan limit, also known as a high-balance loan, borrowers can qualify for financing up to 95%.
  3. Credit score – Homebuyers with scores as low as 620 may qualify
  4. Debt-to-income ratio – Recently, both Fannie Mae and Freddie Mac announced that they would allow DTI limits of up to 50% depending on the borrower’s credit score and reserve requirements with an automated underwriting approval.2 3
  5. Rate options – Both adjustable-rate mortgages and fixed-rate mortgages are available. An adjustable-rate mortgage*, better known as an “ARM,” is a home loan with an interest rate that can change periodically. Your monthly payments will go up or down when interest rates fluctuate. A fixed-rate mortgage is a loan where the interest rate remains the same for the entire term of the loan, resulting in a fixed payment amount that will not change. A fixed-rate mortgage is a more common option.

Benefits of Conforming Loans

For those who qualify, the primary advantage of this type of loan is that interest rates are usually lower than the rates of Non-conforming loans. Lower interest rates can mean lower monthly payments. Most lenders offer several different programs tailored to different homebuyer situations, which gives you flexibility when shopping for the most competitive rates and terms to maximize how much you can get from a loan.

What is a Non-conforming loan?

Loans that are not backed by Fannie Mae and Freddie Mac and do not meet the requirements set by the FHFA are considered Non-conforming. Jumbo loans are Non-conforming because they exceed the baseline loan limit.

Characteristics of a Non-conforming loans

Jumbo mortgage loans are non-government loans that are typically used by borrowers looking for larger loan amounts. Check out the five features of Non-conforming loans to find out if this type of loan is right for you.

  1. Loan limits – If you want to buy a home that is listed above the Conforming loan limit for your area, a Jumbo mortgage can be a good option. Banks and lenders set their own maximum limits for Jumbo loans. Guild Mortgage offers Jumbo loans as high as $3 million.
  2. Down payments – You don’t necessarily need a large down payment to qualify. Borrowers who have funds for at least a 3% down payment may consider this type of loan.
  3. Credit score – Jumbo loans commonly require excellent credit scores, a score of 700 or higher is ideal.3 Borrowers typically also have a good credit history, meaning they make timely payments and maintain low or zero balance on credit cards.
  4. Debt-to-income ratio – According to  the balance, “The maximum debt-to-income ratio that most lenders enforce is 43%, but they may make exceptions depending on the circumstances”4
  5. Rate options – Jumbo loans are also available in different fixed-rate loan terms and as adjustable-rate mortgages

Benefits of Non-conforming loans

Jumbo loans are great options for borrowers looking to buy a more expensive home with excellent credit scores and a strong financial situation.

Choosing the right home loan program

Do you still have questions about Conforming and Non-conforming loans? Guild is here to help. We offer advice on hundreds of loan products for a wide array of borrower situations. Connect with an experienced loan officer to guide you through the home loan process.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.

*The ARM rate is variable and subject to change. The loan will adjust after the initial introductory period and can adjust afterwards by an agreed upon number of adjustments during a set number of years. The interest rate can increase to a cap maximum percent during the life of the loan.

1 2019 Conforming Loan Limits by County – LoanLimits.org

2 What is a Non-Conforming Loan? – the balance

3 How Much Debt Can I Have and Still Get a Mortgage Loan? – Home Buying Institute

4 How Jumbo Loan Limits Work for Home Buying – the balance

5 What is a Non-Conforming Loan? – the balance