Conforming Versus Nonconforming Loans

Dec 15, 2023

When applying for a mortgage, it’s important to understand the difference between conforming and nonconforming loans. Conforming loans offer more protections and could save you money long-term. Nonconforming loans are more accessible, offer larger loan amounts and carry a wider variety of features.

Which is right for you depends on a combination of factors. Here are a few key considerations.  

Conforming Loans

Conforming loans are designed to streamline the purchase of loans by government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. To be considered conforming, loans must adhere to Federal Housing Finance Agency, Dodd-Frank Act and Consumer Finance Protection Bureau guidelines. Conforming loans cannot exceed a set limit (currently $726,200 in most areas), allowing them to be sold in the secondary market.

As a result, conforming loans usually have both lower interest rates and monthly payments, which helps reduce their lifetime costs. Plus, they’re backed by GSEs, which means they offer certain protections, such as the pandemic-inspired foreclosure moratorium. However, they can be difficult to obtain for borrowers with low income, bad credit or high debt-to-income ratios.

Nonconforming Loans

A nonconforming loan is any loan that fails to meet the requirements for conforming loans. For example, a jumbo loan is considered nonconforming because it exceeds the maximum loan limit for conforming loans. Jumbo loans also have different underwriting guidelines, which poses a greater risk to GSEs.

Since nonconforming loans don’t have the same standardization as their conforming counterparts, loan types and features can vary. Lenders are free to set more stringent loan requirements and interest rates/lifetime costs may be higher. But nonconforming loans often require little to no down payment, have lower credit score requirements and offer larger loan amounts.

Not sure which loan type is right for you? Reach out today for expert mortgage guidance.