What is a conforming loan?

A conforming loan refers to a type of conventional mortgage that aligns with the criteria set by the Federal Housing Finance Agency (FHFA). Meeting its standards makes these loans eligible to be purchased by Fannie Mae and Freddie Mac. By buying mortgages, Fannie and Freddie reduce risk for lenders. This practice also frees up more money for lenders to use to fund additional mortgages.

As a result, most mortgage lenders offer conforming loans, and conforming loans are mostly what they offer. Within conforming loans, there’s the option for a fixed or an adjustable rate. Term lengths can also vary, with 15- and 30-year terms being the most popular.

Conforming loan limits and rules

A mortgage must abide by certain standards to be considered conforming and eligible for Fannie Mae and Freddie Mac to purchase. These requirements, which relate both to the borrower and the loan itself, include:

• Loan limit – 2025’s limits are $806,500 for a single-family home in most markets, but go up to $1,209,750 in higher-cost areas.
• Borrower credit score – At least 620
• Borrower debt ratios – Ideally, a debt-to-income (DTI) ratio of 36 percent or less, though it can go up to 50 percent with specific compensating factors
• Down payment/home equity – At least 3 percent down for a purchase or 5 percent equity for a refinance. However, if you put down less than 20 percent or have less than that in equity, you’ll need to pay private mortgage insurance (PMI) and will have a higher interest rate.
• Loan-to-value (LTV) ratio – As high as 97 percent, depending on the mortgage and the borrower

Pros and cons of conforming loans

Pros

• Low down payment: For conforming loans, the minimum down payment is 3 percent. This amount is much lower than for a non-conforming jumbo loan, which is usually 10 (at the very least) to 20 percent, or even 25 percent.
• More readily available: Conforming loans’ popularity means you’ll have many different lenders to choose from when comparing products. Plus, since the process is standardized, you may be able to close on your home quicker and easier with a conforming loan.
• You can avoid mortgage insurance: If you put at least 20 percent down on a conventional conforming loan, you won’t need to pay for private mortgage insurance. Even if you don’t put 20 percent down, you can have PMI removed once you have 20 percent equity. The average cost of PMI is 0.46 percent to 1.5 percent of the loan amount per month, according to an analysis by the Urban Institute, so this cost can be significant.

Cons

• Borrowing limits: The home you want to buy could exceed conforming loan limits, especially if you’re in a market that expensive (but not a designated high-cost one).
• Higher credit score needed: You need a credit score of 620 or higher for a conventional conforming loan, whereas some government loans can be had for a score as low as 500.
• Limits on debts: Your debt-to-income (DTI) ratio must meet conforming loan standards set by the FHFA. The maximum DTI ratio is typically 36 percent. Sometimes, that can stretch to 43 percent or even 50 percent if you have other “compensating factors,” such as a higher credit score or a lot of savings, but it’s rare.

How to get the best conforming loan for you

There are several steps you can take to help you get the best conforming loan for your circumstances:

1. Check your credit report

As far in advance as possible, check your credit report and history at AnnualCreditReport.com. Check your reports carefully for out-of-date items and factual errors. Dispute any errors you spot, because even minor issues can result in a lower credit score.

2. Get your documents in order

Get your paperwork together so you’re prepared for the mortgage application process. Lenders can now get a lot of information directly from banks and the IRS, but it’s still a good idea to have documents like payroll stubs, bank statements, retirement accounts, W-2 forms and tax returns handy.

3. Get preapproved

Once you find a lender you’re interested in working with, you can get preapproved for a loan. Preapproval can help expedite the financing process and uncover any issues related to your credit before they show up when you formally apply for a mortgage. Getting preapproved also helps demonstrate to a home seller that you’re a serious buyer. You are then ready to shop for the best rates!