Conforming Loans, Rates and Mortgage Underwriting Guidelines for Conventional Homes

A conforming loans is a type of regular or conventional loan, which means it’s a mortgage that isn’t supported by the government. The Federal Housing Finance Agency (FHFA) decides how much money you can borrow with a regular loan, and in 2023, that limit is $726,200 for most areas in United States of America.

If you want to borrow more money than what the FHFA says is the limit, you would need a nonconforming loan. This is the type of loan you’d get when you’re borrowing above that set limit.

Conforming loan Definition – What 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 Federal Housing Administration (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. For 2023, the limit is $726,200 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $1,089,300.

Conforming loans vs Nonconforming loans Property

Both conforming and nonconforming loans are types of regular mortgages we know as conventional loans. The main differences depend on how much money you’re borrowing and the conditions you need to meet to qualify.

If you’re borrowing an amount that falls within the limit set by the FHFA, you’ll qualify for a conforming loan. But if you need to borrow more than that limit, you’ll need a nonconforming loan, which is sometimes called a jumbo mortgage.

For a conforming loan, most lenders usually want your credit score to be at least 620. They also look at your debt-to-income ratio, which is the comparison between how much money you owe and how much you earn. This ratio typically falls between 36% and 50%. Additionally, you’ll usually need a down payment of 10%. However, if your conforming loan is backed by government-supported mortgage companies like Freddie Mac or Fannie Mae, you might be able to make a down payment as low as 3%.

Nonconforming loans have stricter eligibility requirements. This is because lenders take on a bigger risk when they lend you more money. Different lenders have different criteria for nonconforming loans, but generally, you’ll likely need a higher credit score, a lower debt-to-income ratio, and a larger down payment compared to a conforming mortgage.

Conforming loans vs other Types of Mortgages

A conforming loan is a type of conventional loan or regular mortgage, but you’re not limited to just regular mortgages. You have the choice to go for a mortgage backed by the government.

There are different requirements for each type of government-backed loan. The main types are:

  1. FHA loans: These mortgages allow you to have a lower credit score and a higher debt-to-income ratio compared to conforming loans. You’ll need a down payment of 3.5%.
  2. VA loans: If you’re from a military family, you can get a VA loan without having to pay any down payment.
  3. USDA loans: These are for people with a moderate income who are buying a home in a rural or suburban area. You can get a home with no down payment.

Even if you qualify for a conforming loan, you might discover that one of these government-backed mortgages suits you better based on your situation.

Read Also:

Current Mortgage and Refinance Rates

The rates provided below are just examples and are based on certain assumptions. To get a more accurate idea of what rates you might qualify for, you can use our calculator. This tool will give you estimated rates for both mortgage and refinance loans based on your individual needs.

If you’re looking to buy a home, a mortgage prequalification will help you get a rate estimate. This process involves checking your credit history, and the best part is that it won’t have any impact on your credit score.

For those interested in refinancing, you can use an online mortgage calculator. It takes into account factors like your location, the value of your property, and the amount of the loan you’re considering. This will help you quickly see the rates that could apply to your specific situation. It can be foe any of the following

  • Investing & Wealth Management
  • Small Business
  • Commercial Banking
  • Corporate & Investment Banking
  • Personal banking
  • Home Mortgage Loans
  • Current Mortgage and Refinance Rates

Purchase rates from Wells Fargo

ProductInterest RateAPR
Jumbo Loans– Amounts that exceed conforming loan limits
7/6-Month ARM Jumbo6.250%7.133%
15-Year Fixed-Rate Jumbo6.375%6.586%
30-Year Fixed-Rate Jumbo6.375%6.503%
Conforming and Government Loans
7/6-Month ARM6.375%7.279%
15-Year Fixed Rate5.875%6.214%
30-Year Fixed-Rate VA6.125%6.454%
30-Year Fixed Rate6.625%6.812%
Rates, terms, and fees as of 8/10/2023 10:15 AM Eastern Daylight Time and subject to change without notice.

Refinance Rates from Wells Fargo

ProductInterest RateAPR
Jumbo Loans– Amounts that exceed conforming loan limits
7/6-Month ARM Jumbo6.500%7.260%
15-Year Fixed-Rate Jumbo6.625%6.813%
30-Year Fixed-Rate Jumbo6.625%6.728%
Conforming and Government Loans
30-Year Fixed Rate7.250%7.460%
Rates, terms, and fees as of 8/10/2023 10:15 AM Eastern Daylight Time and subject to change without notice.

The Advantages and Disadvantages of Conforming loans

Before you decide to apply for a conforming loan, it’s a good idea to weigh its pros and cons compared to nonconforming loans and government-backed loans.

Advantages (Pros) of Conforming Loans:

  1. Easier Qualification: Conforming loans usually have less strict requirements compared to nonconforming loans. It’s generally easier to qualify for a conforming loan than a jumbo loan, which often demands a higher credit score, lower debt-to-income ratio, and more substantial down payment.
  2. Lower Interest Rates: Lenders typically offer lower interest rates on conforming loans compared to nonconforming loans.

Disadvantages (Cons) of Conforming Loans:

  1. Stricter Compared to Government-Backed Loans: Government-backed mortgages may have more lenient requirements. Depending on the type of government loan and the lender, you might qualify for a loan with a lower credit score, higher debt-to-income ratio, or lower down payment than with a conforming loan.
  2. Borrowing Limit: Conforming loans come with a borrowing limit. If you need to borrow more than what the FHFA allows, you’ll need to consider a nonconforming loan.
  3. Private Mortgage Insurance (PMI): If your down payment is less than 20%, you’ll have to pay for PMI until you build more equity in your home. PMI can range between 0.2% and 2% of your mortgage amount. While government-backed loans have their fees, they don’t require PMI. Avoiding PMI could save you money in the long run.
  4. Higher Interest Rates than Government-Backed Loans: FHA, VA, and USDA loans typically have lower mortgage rates compared to conforming loans offered by most lenders.

In summary, while conforming loans have advantages such as easier qualification and lower interest rates compared to some nonconforming loans, they might have stricter requirements and limitations on borrowing. It’s important to consider these factors in comparison to government-backed loans to determine the best fit for your financial situation. You can use Fannie Mae and Freddie Mac guidelines for more help.

Helpful Insights

- Advertisement -

Related Stories