Unlocking the 🔑 mystery: Conforming vs. Conventional Mortgages Explained!

When you are shopping for mortgages, you may come across the term “conforming loan.” Is that something different than a conventional loan? Does this matter to you as a borrower? Here’s a quick explanation of conforming loans.

Fannie Mae and Freddie Mac

Although all conforming loans are conventional loans, not all conventional loans are conforming. A conforming loan is any conventional loan that meets certain criteria set by the Federal Housing Finance Agency. The main feature of these criteria is the limit on loan size. In most areas of the country in 2020, that limit is $510,400 for a single-family home. In higher-cost markets such as San Francisco and New York, the cap is $765,600. Loans that exceed these dollar caps are called non-conforming or jumbo loans.

Each year the FHFA surveys lenders to gather current data on home sales prices, interest rates, and terms, then calibrates the conforming loan standards accordingly. Price caps vary down to the county level.

The size of a loan is not the only factor that makes it conforming. Other criteria set parameters on the loan-to-value ratio, the borrower’s debt-to-income ratio and credit score, and the amount of the down payment.