Conforming vs. nonconforming loans: What’s the difference?
Key takeaways
- Conforming loans comply with government guidelines for mortgages and can be sold to government-backed enterprises, while nonconforming loans do not meet these criteria and cannot be sold to these enterprises.
- Conforming loans generally offer lower interest rates and fairly rigid qualifying criteria, while nonconforming loans may have higher rates and more flexible credit requirements.
- Nonconforming loans are a good option for buying a more expensive property or for borrowers with credit issues, but they may come with higher risks and costs.
Buying a home is a huge financial decision, and trying to find the right loan can feel overwhelming. As you search for mortgage options, you’ll likely come across a number of new terms — including conforming and nonconforming loans.
What’s the difference between the two? Plenty. Let’s dive into what distinguishes conforming vs. nonconforming loans and which one may be a better fit for your needs.
Differences between conforming and nonconforming loans
Key terms
- Conforming loan
- A conforming loan is a type of mortgage that complies with the financial and funding boundaries laid out by the Federal Housing Finance Agency (FHFA). As a result, it is eligible to be resold to the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.
- Nonconforming loan
- A nonconforming loan does not comply with the parameters established by the FHFA. So, it cannot be sold to Fannie Mae and Freddie Mac.
Conforming loans and nonconforming loans, two varieties of mortgages, differ in many aspects, including:
- Loan limits: Conforming loans abide by the loan size limits dictated by the FHFA each year, and they comply with the underwriting standards of the Dodd-Frank Act and the Consumer Finance Protection Bureau. This compliance allows lenders to sell them to Fannie Mae and Freddie Mac, which buy or back most of the mortgages in the U.S. Meanwhile, nonconforming loans fail to comply with these size caps and regulations.
- Interest rates: Generally, conforming loans, which are more common than nonconforming loans, offer relatively low interest rates, which result in relatively low lifetime borrowing costs.
Keep in mind: Though the terms are used interchangeably sometimes, a conforming loan is not exactly the same as a conventional loan. Conventional loans refer to any mortgage available through and backed by a private-sector lender (as opposed to a government agency). While all conforming loans are conventional loans, not all conventional loans are conforming loans.
What is a conforming loan?
A conforming loan is one that conforms to the guidelines set by the FHFA and other federal authorities, many of which were put into place following the subprime mortgage crisis in the mid-2000s. There are several criteria you must meet to qualify for a conforming loan, including the amount you’re borrowing.
Conforming loans exist so government-sponsored enterprises (GSEs) Fannie and Freddie can buy them, with the assurance they fit a standardized set of requirements. Since these loans are bought and sold on the secondary mortgage market, they reduce the lender’s risk in issuing them, and can act as a revenue source for a lender. So the lender can in turn offer mortgages to new borrowers, making it for everyday people to be able to borrow funds to buy homes.
Pros and cons of conforming loans
Pros
- Lower interest rates mean lower monthly payments and less money spent over the loan's duration
- Standardized underwriting and approval process, meaning there could be fewer surprises when applying for a loan
- Could come with certain protections in times of crisis, such as the foreclosure moratorium that the federal government enacted during the pandemic
Cons
- Can be hard to get if you have a low income and credit score, and a high debt-to-income (DTI) ratio
- Might not provide enough funds if you’re buying a luxury home or a standard one in an expensive area
What is a nonconforming loan?
Mortgage loans that don’t meet the requirements for a conforming loan are considered nonconforming loans. Jumbo loans are a common type of nonconforming loans: They exceed the maximum loan limit for an area. But loans can be nonconforming for other reasons beyond loan size. For example, government-backed loans such as FHA, VA and USDA loans are nonconforming loans.
Compared to conforming loans, there is a much wider diversity of loan types and features among nonconforming loans. It’s important to remember that nonconforming mortgages often come with higher interest rates than conforming loans. Additionally, the process of securing a nonconforming loan can be quicker and require less documentation than the process of securing a conforming loan.
Nonconforming loan requirements
If you’re planning on getting a jumbo loan, lenders may demand that you have a high credit score, high cash reserves or assets and/or a low debt-to-income ratio (DTI ratio). Additionally, you can expect to put down between 10 to 30 percent upfront; exact amounts vary by lender.
Here are three common reasons borrowers don’t qualify for conforming loans:
- Loan size: For 2024, if you’re borrowing more than $766,550 (in much of the U.S.) or more than $1,149,825 (in high-cost areas such as Hawaii), you’ll need a nonconforming loan. Less than that and a conforming loan will do. These figures will change in 2025, so keep an eye out for updates toward the end of the year, when the new limits are announced.
- Credit score: If you’ve experienced credit troubles and your FICO score is less than 620, you might not qualify for a conforming loan. For borrowers with low credit scores, mortgages issued by the Federal Housing Administration (FHA) are a popular nonconforming alternative. FHA loans allow for credit scores of 580 (or 500 with a higher down payment than the standard 3.5 percent.) One downside: Mandatory mortgage insurance premiums (MIP) can increase the costs of FHA loans.
- A high DTI ratio: When you have a high DTI ratio, it means your monthly obligations eat up too high a percentage of your monthly income — generally over 45 percent of it. If your debt level pushes you out of conforming-loan territory, you still might be able to get an FHA mortgage or a type of nonconforming loan known as a non-qualified or non-QM mortgage.
Pros and cons of nonconforming loans
Pros
- Expands your options by allowing you to buy in a more expensive area or a home that's ineligible for a conforming loan
- More accessible for borrowers with credit issues, including bankruptcy
- Higher loan limits
Cons
- May be harder to find and compare — fewer lenders offer them, since they pose a greater risk
- Can be more expensive than conforming loans due to higher rates and additional fees
- May lack conforming-loan protections relating to borrowing limits, loan terms and delinquency
Conforming loan vs. nonconforming loan: Which is best for you?
Conforming loans |
Nonconforming loans |
|---|---|
| Amount must be $766,550 or less in most areas of the U.S. (up to $1,149,825 in certain expensive housing markets) | Not capped at any certain dollar amount |
| Ideal if you have good credit and a low debt-to-income ratio | Appealing if you less-than-perfect credit and/or a unusual financial situation |
| You may be able to qualify with a small down payment | Often requires larger down payment |
| Offers the most competitive interest rates available | Typically charges higher interest rates |
| More widely available, offered by most lenders | Less common and may require some extra shopping around |
If the price of your desired home is within conforming loan limits and your credit history meets eligibility requirements, you’re better off seeking a conforming loan, which generally has a lower rate and lower down payment requirement than a nonconforming loan.
A nonconforming loan will suit your needs if you’re looking to buy a more expensive property and require a bigger sum to borrow. It’s also a better choice if you have negative marks on your credit history or don’t meet the qualification criteria for a conforming loan. But while nonconforming loans have some benefits, they have downsides, including potentially higher interest rates.
You can contact your bank and other lenders directly to ask them about the types of nonconforming loans they offer. Another avenue worth exploring: Find a mortgage broker who specializes in nonconforming loans.
No matter which loan type is the right choice for your situation, do your homework before selecting a mortgage lender. Request loan estimates from several different lenders. Then, compare the interest rates and loan terms to ensure you find the best option.
Additional reporting by David McMillin
