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Conforming and Non-Conforming Loans: What's the Difference?

Generally speaking, a conforming loan is a conventional mortgage that falls under $424,100 in total size. Some US counties with particularly expensive housing markets will allow higher conforming limits. Besides loan amount, there are several other criteria that help identify whether a loan is conforming or nonconforming. These include the amount of debt you carry and the size of your down payment on the home.

What is a Conforming Loan?

A conforming loan is a mortgage that meets certain rules established by Fannie Mae and Freddie Mac, two government-sponsored corporations that buy and securitize conventional mortgages. While conforming loans are usually described in terms of loan amounts, they're also defined by credit score, debt-to-income and loan-to-value ratios.

Conforming Loan Limits

As of 2017, the conforming loan limit in most counties of the US is $424,100. However, Fannie Mae and Freddie Mac raise this figure for areas where housing is generally more costly than in the rest of the country.

States With High-Cost Loan Limits

StateMaximum Conforming Loan Limit
Alaska $636,150
California $636,150
Colorado $636,150
Connecticut $601,450
District Of Columbia $636,150
Florida $529,000
Georgia $515,200
Guam $636,150
Hawaii $721,050
Idaho $636,150
Maryland $636,150
Massachusetts $636,150
Nebraska $433,550
New Hampshire $598,000
New Jersey $636,150
New York $636,150
North Carolina $625,500
Pennsylvania $636,150
Rhode Island $426,650
Tennessee $466,900
Utah $636,150
Virgin Islands $636,150
Virginia $636,150
Washington $592,250
West Virginia $636,150
Wyoming $636,150

While credit score and other factors also count as requirements for a conforming loan, the most common rule is that a conforming loan must not exceed a certain amount. Usually this limit is set at $424,100, but the following states allow higher limits to account for high-cost areas such as San Francisco or New York City. Inherently high property values in Alaska and Hawaii mean that those entire states operate under the high-cost loan limit. Whichever limit applies to your area, you will have to keep your initial loan amount below that figure in order to obtain a conventional mortgage.

The specific rules for conforming and nonconforming mortgage loans are designed to ensure the high quality of mortgages that lenders approve and submit to Freddie Mac and Fannie Mae. Because these companies buy millions of mortgages and repackage them into mortgage-backed securities, it's critical that the underlying assets remain stable. Without rules like the conforming loan limit, lenders might extend too many risky mortgages, leading to a collapse much like the financial crisis in 2008-2009.

Other Conforming Loan Requirements

In addition to the conforming loan limit, the government-sponsored enterprises set out rules for credit score, loan-to-value ratio and debt-to-income allowed on a conforming loan.

Standard Eligibility Requirements for Conforming Mortgages

Max LTVMin Credit Score if DTI ≤ 36%Min Credit Score if DTI ≤ 45%
Fixed Rate Mortgage95%620-680640-700
Adjustable Rate Mortgage90%640-680640-700

Loan to Value Ratio (LTV). Your loan-to-value ratio is dependent on the size of your initial down payment. For instance, putting down $10,000 on a home that costs you $100,000 would require a $90,000 mortgage loan and an LTV of 90%. Lenders typically require down payments of at least 20% (meaning 80% LTV), but the absolute maximum LTV required to sell a mortgage to Fannie Mae is set at 95% for a standard fixed rate mortgage and a stricter 90% for adjustable rate loans.

Debt to Income Ratio (DTI). Debt to income ratio has less to do with your mortgage: it's the amount that you currently have to pay for all your personal debts, measured as a portion of your income. This includes other credit products like personal loans, auto loans and credit cards. In the context of conforming loans, your DTI must be 45% or lower. However, you may need an even lower DTI of 36% if your credit score doesn't meet the minimums listed above for the 45% DTI bracket.

Credit Score. The minimum credit requirement for a conforming loan varies based on whatever combination of DTI and LTV ratios you're bringing to the table. If you have a lower LTV and DTI, then your credit requirement will also be lower. Another way to qualify for a conforming loan with a lower credit score is to save money: Fannie Mae's eligibility matrix drops the minimum credit score by 20 points if you can show that you have enough assets to cover 2 to 6 months of monthly mortgage payments.

What is a Nonconforming Loan?

Simply put, a nonconforming loan is any mortgage loan that doesn't meet the requirements established by Fannie Mae and Freddie Mac. These companies won't purchase nonconforming loans for securitization, making it harder for lenders to provide them and driving up the cost of nonconforming loans for the borrower. Most nonconforming loans will be jumbo mortgages, which usually meet credit and income requirements but exceed the local conforming loan limit.

Jumbo loans aren't just bigger than conventional mortgages: the unique challenges of high-end real estate make them a riskier undertaking for lenders. If a jumbo mortgage ends in default, the lender may find it harder to sell off the foreclosed home at full price. High-end properties are more sensitive to changes in the market, and the limited demand for such properties means that the final sales price is also subject to more negotiation. Both these factors mean that lenders are more careful about approving jumbo mortgages and often expect higher down payments and credit scores from the borrower.

How Much Do Conforming and Nonconforming Loans Cost?

Nonconforming loans are generally more expensive than conforming loans simply because they are less common and more difficult for lenders to provide. Nonconforming mortgages requires several extra steps, such as creating a longer-term escrow account and obtaining multiple appraisals. All of these steps are intended to reduce the risk of a default, but they also add fees that will drive up your costs as the borrower.

Conforming LoanNonconforming Loan
Loan Amount$424,000$428,000
Interest Rate4.13%4.00%
Monthly P+I$2,055$2,043
Closing Costs$5,254$6,838

As an example, we obtained a pair of online mortgage estimates from the same lender. One loan fell just below the conforming loan limit while the other was several thousand dollars above the limit. The quoted interest rate was actually higher for the conforming loan, but this was due to the fact that the lender assumed that our hypothetical borrower would agree to preauthorize monthly payment transfers. While many lenders include such assumptions to display lower jumbo mortgage rates, the base jumbo rates are typically higher than conforming loan interest rates.

The closing costs for a nonconforming loan were about $1,400 higher than the same fees for the conforming loan. For the most part, nonconforming mortgages will have higher closing costs simply because the largest mortgage fees are calculated as a percentage of your loan balance. Since nonconforming loans are most often jumbo loans, their higher balances will produce a higher dollar amount in closing costs —even though the types of fees stay relatively similar to the fees on conforming loans.

Sources

FHFA Conforming Loan Limits Map

Fannie Mae Eligibility Matrix

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