Conforming Conventional Loans: What They Are and How They Work

When shopping for a mortgage, you’ll likely come across the terms “conforming loan” and “conventional loan.” These types of mortgages make up a large share of the home loans originated each year. But what exactly do they mean?

Conforming conventional loans refer to a specific category of mortgages that meet certain criteria set by government agencies. Let’s break down what conforming and conventional loans are, how they work, and why they may be a good option for many homebuyers.

What is a Conforming Loan?

A conforming loan is a mortgage that conforms to limits and standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that securitize and guarantee most home loans in the U.S.

To be conforming a loan must

• Fall under Fannie and Freddie’s maximum loan limits for that local area (e.g. $726,200 for most counties in 2023)

• Meet borrower requirements like a minimum credit score and debt-to-income ratio

• Have an LTV ratio within eligibility guidelines (usually 80-97%)

• Be for a single-family home, condo, or co-op

Basically, conforming loans follow the strict criteria to be purchased and guaranteed by Fannie and Freddie on the secondary mortgage market. This gives lenders more liquidity to fund new loans.

Over 60% of mortgages originated today are conforming loans.

What is a Conventional Loan?

A conventional loan is any mortgage that is not insured or guaranteed by a government agency. This contrasts with government-backed loans like FHA, VA, and USDA mortgages.

Conventional loans are issued by private lenders like banks, credit unions, and mortgage companies. They follow guidelines set by those institutions, not the government.

Within conventional mortgages, there are:

• Conforming – Meet standards for purchase by Fannie/Freddie

• Non-conforming – Don’t conform to those standards, like jumbo loans

So conforming loans are a specific segment of conventional mortgages. All conforming loans are conventional, but not vice versa.

Conforming Conventional Loans Explained

When people refer to “conforming conventional loans,” they simply mean mortgages that:

• Are from private lenders, not government programs
• Meet all requirements to be purchased by Fannie Mae or Freddie Mac

These loans offer low interest rates and standard eligibility thanks to the government sponsorship. Lenders like offering them because they can easily sell them to the GSEs for cash flow.

Conforming conventional loans come in two main flavors:

1. Fixed-rate – Interest stays the same for the full loan term, usually 15 or 30 years. Offers predictability.

2. Adjustable-rate (ARM) – Interest is fixed for an initial period then adjusts periodically. Lower initial rates.

Within those structures, you’ll find variations like 10/1, 7/1, and 5/1 ARMs with different fixed periods before adjustment.

Pros of Conforming Conventional Loans

Getting a conforming conventional mortgage offers several advantages:

• Low rates – Conforming loans tend to have the lowest interest rates and costs, saving borrowers money.

• Flexible terms – Choose from a range of loan terms like 15-year, 30-year, ARMs, etc.

• Low down payments – Only 3% down required if you pay private mortgage insurance.

• Wide availability – Offered by most lenders, so you can shop around for the best deal.

• Standardized process – Conforming guidelines make the mortgage process smoother than more specialized loans.

• Underwriting flexibility – Income, assets, and credit are reviewed holistically by underwriters.

• Streamlined documents – Conforming loan documentation requirements are straightforward.

Overall, conforming conventional loans provide an accessible path to competitive mortgage financing for the majority of borrowers.

Cons of Conforming Conventional Loans

The limitations of these mortgages include:

• Loan limits – The maximum loan amount you can borrow is capped based on local home values.

• Credit requirements – Minimum credit scores around 620 are needed for approval.

• Debt limits – Your total monthly debts are restricted, usually to a 36% debt-to-income ratio.

• Home types limited – Only single-family homes, condos, and co-ops qualify.

• Mortgage insurance – Required if you put down less than 20%, adding to costs.

• Home equity – Refinances need at least 5% equity in the home.

For borrowers who fall outside these conforming requirements, an alternative type of conventional loan or a government-backed mortgage may be required.

Conforming Loan Limits

The conforming loan limit determines the maximum amount you can borrow with a conforming loan. It’s based on the average home value in each county and adjusted annually by the FHFA.

For 2023, the baseline conforming loan limit for most areas is $726,200. But it goes higher in more expensive real estate markets:

• Up to $1,089,300 in ultra high-cost areas like San Francisco and New York
• Up to $980,325 in high-cost areas like Seattle and Washington, D.C.

You can check the conforming loan limit in your county on the FHFA website. If the mortgage amount exceeds the limit, you’ll need a non-conforming jumbo loan.

How to Get the Best Conforming Conventional Loan

Follow these tips when applying for a conforming conventional mortgage:

• Check your credit – Make sure your credit scores meet the 620+ minimum required. Dispute and errors beforehand.

• Calculate affordability – Factor in your total monthly debts and income to see how much you can realistically borrow.

• Shop lenders – Compare interest rates and fees from multiple conforming mortgage lenders.

• Get pre-approved – Going through pre-approval identifies any issues early and shows sellers you’re serious.

• Lock your rate – If rates are trending up, lock in your interest rate so it doesn’t rise before closing.

• Minimize spending – Avoid new debts or large purchases during the underwriting process until your loan closes.

Doing your homework lands you the most competitive conforming conventional loan for your financial situation.

Alternatives to Conforming Conventional Loans

Here are some other mortgage options to consider:

• FHA loans – Government-backed with low down payments and credit requirements.

• VA loans – No down payment required for veterans and service members.

• USDA loans – 100% financing available in rural areas for low-income borrowers.

• Jumbo loans – For pricier homes above conforming limits; have higher rates.

• Portfolio loans – Held by local lenders instead of sold to Fannie/Freddie. More flexibility.

• Hard money loans – From private investors/groups; easy to qualify but very high rates.

• Adjustable-rate mortgages (ARMs) – Lower initial rates with variable payments over time.

Run the numbers to see if one of these options may serve your home financing needs better than a traditional conforming loan.

Are Conforming Conventional Loans Right for You?

The bottom line – conforming conventional loans offer a balance of advantages for eligible borrowers.

They provide accessibility and affordability through:

• Competitive interest rates
• Low down payments
• Manageable credit requirements
• Streamlined underwriting

Yet they also ensure responsible lending, thanks to the guardrails set by Fannie Mae and Freddie Mac.

For homebuyers who can meet the standards, conforming conventional mortgages present an attractive mainstream financing option. They open the door to homeownership with relative ease.

Just be mindful of the conforming loan limits in your local real estate market. And explore specialized mortgage programs if your financial profile doesn’t align with conforming requirements.

With the right approach, conforming conventional loans can be the key that unlocks your dream of owning your own home. Do your research to determine if this popular loan type is a fit for your situation.