Conforming vs nonconforming loan: What to know

Quick insights

• Conforming loans adhere to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac, and meet specific criteria related to size and credit score.
• Nonconforming loans, also known as jumbo loans or portfolio loans, do not meet guidelines set by government-sponsored enterprises (GSEs), and often have larger loan amounts, stricter credit score requirements and higher down payment requirements.
• Conforming loans typically carry lower interest rates than nonconforming loans, which could make them more affordable for borrowers. Nonconforming loans may offer more flexibility and customized solutions for borrowers with unique financial situations.

Loans typically fall under two primary categories: conforming and nonconforming. But what exactly does that mean, and what kind of mortgages fall within those two categories? In this guide, we’ll walk you through their differences so you can better understand what loan products are available to you.

What is a conforming loan?

A conforming loan adheres to the guidelines set forth by government-sponsored enterprises such as Fannie Mae and Freddie Mac. These loans meet specific criteria related to size, credit score and down payment. To put it simply, they “conform” to the standards established by these government entities.

From a process perspective, a conforming lender underwrites and funds the loan, and then sells it to Fannie Mae and Freddie Mac. Once the loan is packaged, it’s sold to investors on the open market. Due to their accordance with government regulations, conforming loans typically carry a lower interest rate than non-conforming loans.

Types of conforming loans

Conforming loans are a type of conventional loan. While all conforming loans are conventional loans, not all conventional loans are conforming. Conforming loans meet specific GSE criteria and usually have more favorable terms, while non-conforming loans do not meet these criteria and may have different terms or higher risk factors. Conventional loans come in the form of fixed-rate and adjustable-rate:

• Conventional fixed-rate mortgages (FRMs): These mortgages have a fixed interest rate for the entire term of the loan. Monthly payments are stable and predictable, which could be advantageous for budgeting and financial planning. They adhere to criteria set by GSEs like Fannie Mae and Freddie Mac.
• Conventional adjustable-rate mortgages (ARMs): These mortgages have an interest rate that changes periodically based on market conditions. Initially, the initial interest rate may be lower than that of a fixed-rate mortgage, but it can fluctuate over time, potentially affecting your monthly payments. ARMs often start with a fixed rate for an initial period before adjusting.

What is a nonconforming loan?

In contrast, a nonconforming loan doesn’t meet the criteria set by government-sponsored entities. These loans typically exceed the maximum loan limits set for conforming loans or deviate from other established guidelines. The loan may be larger, require a bigger down payment and have different requirements for their borrowers and therefore isn’t eligible for purchase by GSEs.

Nonconforming loan requirements

Nonconforming loans, also known as jumbo loans or portfolio loans, do not meet the guidelines set by government-sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac. They are not eligible for purchase by these GSEs. They often have different requirements and terms. Here are some of the typical characteristics of nonconforming loans:

• Loan amount: Nonconforming loans often exceed the conforming loan limits set by the GSEs. According to Experian, as of January 2024, the conforming loan limit for a single-family home is $766,550, an increase from $726,200 in 2023. Please note that this can vary by region. Nonconforming loans are used for amounts that exceed these limits.
• Credit score: Mortgage providers may have stricter credit score requirements for nonconforming loans. Higher credit scores are typically needed due to the increased risk associated with these loans.
• Down payment: Nonconforming loans often require a larger down payment compared to conforming loans. This is to help offset the higher risk to the lender.
• Debt-to-income ratio: Loan providers may have stricter requirements regarding the borrower’s debt-to-income (DTI) ratio, which is the ratio of monthly debt payments to monthly income.

Types of nonconforming loans

Government backed loans (FHA, VA) and jumbo loans are common examples of nonconforming loans. A jumbo loan is a loan that exceeds conforming loan limits set by the Federal Housing and Finance Agency (FHFA).

Conforming vs. jumbo loans: Which one should I get?

Deciding between a conforming and a nonconforming loan comes down to what you need, what you can afford and what you ultimately qualify for. However, there are pros and cons of each:

Pros of conforming loan

Conforming loans come with:

• Less stringent eligibility requirements due to agency standards (FNMA and Freddie Mac)
• Lower interest rates (compared to conforming loans).
• Standardized terms and conditions.

Cons of conforming loan

Conforming loans also come with:

• The possibility of maximum loan limits.
• Mortgage insurance requirements.
• Potentially less flexibility as they adhere to certain government standards.

Pros of jumbo loan

Nonconforming loans come with:

• A larger loan limit, meaning you may be able to make a bigger purchase.
• More customized buying solutions, which could be beneficial for borrowers with nontraditional income sources, complex investment portfolios or businesses, for example.
• Potentially more diverse product offerings.

Cons of jumbo loan

Nonconforming loans come with:

• Stricter qualification requirements.
• Higher down payment requirements.
• Potentially less availability due to their stricter requirements.

In summary

Conforming loans are mortgages with regulations and requirements set forth by government-sponsored enterprises. Nonconforming loans are mortgages that fall outside of the requirements set for conforming loans, but may be harder to qualify for depending on what you need the loan for and your personal qualifications. If you’re interested in learning more about what loan type is best for you, do contact a home lending advisor.

Conforming vs. nonconforming loan FAQs

1. Is a conforming loan a conventional loan?

A conforming loan is a subset of conventional loans that meets the guidelines set by GSEs. These guidelines include limits on the loan amount, borrower creditworthiness and other criteria. Conforming loans are eligible for purchase by these GSEs, which generally makes them more attractive to lenders due to the reduced risk.

2. Who might nonconforming loans be best for?

Nonconforming loans are popular among companies making large real estate investments. They’re typically in the form of a jumbo loan and may require high down payments.

3. Who sets conforming loan limits?

The Federal Housing Finance Agency (FHFA) sets conforming loan limits for government-sponsored enterprises that it regulates, Fannie Mae and Freddie Mac