Summary List Placement
A conforming loan is a type of conventional loan, or a mortgage not backed by the government.
The FHFA sets the borrowing limit for conventional loans, which is $548,250 in most parts of the US in 2021.
You’ll need a nonconforming loan to borrow more than the limit set by the FHFA, and you’ll probably have to meet stricter requirements than you would for a conforming loan.
You may prefer a government-backed loan over a conforming loan, especially if you’re of low-to-moderate income or have served in the military.
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Table of Contents: Masthead StickyWhat is a conforming loan?
A conforming loan is a type of conventional loan, or a mortgage not backed by a government agency such as the FHA.
A conforming loan meets the borrowing limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets the limit for conforming loans every year, and in 2021, the limit is $548,250 in most parts of the US. In areas with a higher cost of living, such as Alaska, Hawaii, Guam, and the US Virgin Islands, the limit has been bumped up to $822,375.
Conforming loans vs nonconforming loans
Both conforming and nonconforming loans are types of conventional mortgages. The differences come down to the amount you borrow and the eligibility requirements.
You’ll get a conforming loan if you need to borrow an amount under the limit set by the FHFA. You’ll need a nonconforming loan, otherwise known as a jumbo mortgage, if you need to borrow more.
For a conforming loan, most lenders require at least a 620 credit score and between a 36% and 50% debt-to-income ratio. You’ll also need a 10% down payment, or just 3% if your conforming loan is backed by government-sponsored mortgage companies Freddie Mac or Fannie Mae.
Eligibility requirements for nonconforming loans are a bit stricter, because lenders are taking a greater risk by lending you more money. Each lender has its own requirements for nonconforming loans, but you’ll likely need a higher credit score, lower DTI, and bigger down payment than you would for a conforming mortgage.
Conforming loans vs other types of mortgages
A conforming loan is a type of conventional loan, but you don’t necessarily need to get a conventional mortgage. Instead, you may opt for a government-backed mortgage.
Each type of government loan has its own eligibility requirements. There are three main types of government-backed mortgages:
FHA loans: You can get a mortgage with a lower credit score and higher DTI than with a conforming loan, and you’ll need a 3.5% down payment.
VA loans: Military families can get VA loans with no down payment.
USDA loans: You can buy a home with no down payment if you have a low-to-moderate income and are buying in a rural or suburban area.
You may find that one of these types of mortgages is a better fit than a conventional mortgage, even if you’re borrowing …read more
Source:: Business Insider