What Is a Conforming Loan?
A conforming loan is a mortgage that meets the requirements to be purchased by housing finance giants Fannie Mae or Freddie Mac. If you're in the market for a home, you've probably heard this term, along with others, such as nonconforming loan and conventional loan.
As you choose the right loan for your needs, you should understand the features of a conforming loan. Keep reading to find out what is a conforming loan and whether it's the right product for you.
What Are the Conforming Loan Limits for 2022?
Home prices rose dramatically in 2021, and the conforming loan limits for the new year reflect that rise.
The conforming loan limit in 2022 for single-family dwellings is $647,200. That's an 18.05% increase from 2021's limit of $548,250 and a dollar increase of almost $100,000. This matches the percentage increase in the average U.S. home value over the past year.
Limits are higher for multifamily properties. The caps in 2022 are:
-- $828,700 for a two-unit property.
-- $1,001,650 for a three-unit property.
-- $1,244,850 for a four-unit property.
What Is the High-Balance Conforming Loan Limit for 2022?
Although most counties follow the baseline limits, some areas with higher-than-average property values will have higher conforming loan limits.
High-cost areas tend to be on the West Coast as well as in the Northeast, Alaska and Hawaii. For a single-unit home in these areas, the conforming loan limit in 2022 is $970,800; 150% of the baseline limit of $647,200.
The caps for multifamily properties in high-cost areas in 2022 are:
-- $1,243,050 for a two-unit property.
-- $1,502,475 for a three-unit property.
-- $1,867,275 for a four-unit property.
Counties in these areas are allowed high-balance conforming loans that exceed the baseline limit. High-balance conforming loans must also follow the lending guidelines set by the Federal Housing Finance Agency.
You can find the conforming loan limit for your area here or speak with a mortgage professional.
[Read: Best Mortgage Lenders.]
Conforming vs. Nonconforming Loans: What's the Difference?
As the name indicates, a conforming mortgage must meet, or conform to, Freddie Mac and Fannie Mae purchase criteria, including:
-- The dollar limit on the size of the loan set by the FHFA.
-- The type of property.
-- The down payment and borrower's credit history.
When a loan exceeds FHFA loan limits, it may be referred to as a jumbo loan and cannot be purchased by Fannie or Freddie. Jumbo loans usually have stricter rules, such as higher credit score or cash reserve requirements, compared with other types of mortgages because the borrower is taking on a larger amount of debt.
Mortgages are also considered nonconforming when they do not meet the other purchase requirements of Fannie Mae and Freddie Mac, says Mike Laffey, branch production manager for Silverton Mortgage in Charlotte, North Carolina.
Fannie Mae and Freddie Mac use strict underwriting criteria, including credit score and debt-to-income ratio guidelines, for the loans they buy and sell on the secondary market. They allow lenders to offload risk and pass on better rates and terms to borrowers.
Is a Conforming Loan the Same as a Conventional Loan?
Nonconforming loans are simply those that do not meet Fannie and Freddie requirements. Some people use the terms conforming loan and conventional loan interchangeably, but there is a difference.
A conventional loan is a loan that does not have government backing or insurance. Some of the government agencies that secure mortgages include the Federal Housing Administration, the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs.
[Read: Best FHA Loans.]
How Can You Get a Conforming Loan?
You'll need to meet guidelines set by Fannie and Freddie to qualify for a conforming loan. These include:
-- A credit score of at least 620.
-- A debt-to-income ratio of up to 45% -- and 50% in some cases.
-- A stable and verifiable income.
Debt-to-income ratio refers to how much of your income is needed to cover your monthly debt payments. If you earn $7,000 per month and you pay $2,000 for your home loan and $1,000 for your other monthly bills, your DTI would be about 43%.
An income situation that is straightforward can also be helpful. "The way we verify income has to be very traditional," Laffey says.
A W-2 showing steady income can make qualifying easier than if you have fluctuating self-employed income or if you have job-hopped in the last couple of years. That's not to say that freelancers or entrepreneurs can't get conforming loans, but they could have to jump through more paperwork hoops to get them.
If you can't quite meet the standards for conforming loans, do not worry, Laffey says. "There's a marketplace and other programs available for people who don't fit that box."
[Read: Best VA Loans.]
Is a Conforming Loan Good?
When you get a conforming loan, you are working within limits the FHFA has deemed low risk.
A conforming loan can offer a great deal if you meet borrowing criteria, Laffey says. "If you can do the pay stubs and W-2s, and your credit and debt ratios are in line, you can end up with better terms" with a conforming loan, he says.
But most important, says Doug Leever, mortgage sales manager for South Florida's Tropical Financial Credit Union: "Shop around and get with a trusted lender."
