If you’re in the market to buy a house soon, you might have come across the terms conforming and non-conforming loans. It’s just one extra layer that adds to the confusion of buying a house, but knowing the difference can help you target the right kind of loan for your situation. And that can actually help you get the house you want, or even help you save money.

Key Differences: Conforming vs. Non-conforming Loans

There are different classifications of loans you can use to buy a home, and conforming and non-conforming loans are of the most common. A conforming loan meets the guidelines to be sold to either Fannie Mae or Freddie Mac, two of the largest mortgage buyers in the U.S. Non-conforming loans, on the other hand, are those that fall outside those guidelines, so they can’t be sold to Fannie Mae or Freddie Mac.

All mortgages fall under one of these two umbrellas—they’re either conforming to Fannie and Freddie guidelines, or they’re not. The differences between these two lead to some interesting after-effects that impact you—the buyer.

Conforming loans Non-conforming loans

Loans may be sold to Fannie Mae or Freddie Mac

Loans may be held by lender, or sold to another lender

More likely to be cheaper

More likely to be expensive

More common

Less common

Limited to $548,250 in most areas (and up to $822,375 in some high-cost-of-living areas)

Potentially no limits on loan size

Faster, easier mortgage lending

Check your rates today with Better Mortgage.

What Is a Conforming Loan?

A conforming loan gets its name because it conforms to Fannie Mae and Freddie Mac guidelines. These two businesses were created by Congress in 1938 and 1970, respectively, with a specific job: to buy mortgages that other lenders, like your neighborhood bank, give out. This frees up your lender’s cash so they can make more loans, and thus the process continues so more people can afford to buy homes.

The mission of Fannie Mae and Freddie Mac results in them buying the majority of the mortgages banks give out. But in order to accept them, they can’t be all willy-nilly; they have to be standardized and made under certain guidelines. That’s where the conforming part comes in, and why there are so many underwriting rules with these loans: it’s to standardize the loans so that Fannie Mae and Freddie Mac can buy them.

Conforming Loan Requirements

You’ll generally need to meet these requirements in order to get a conforming loan:

Conforming Loan Benefits

Since lenders can offload the mortgage they just gave to you (and the risk of default with it) by selling it to Fannie Mae and Freddie Mac, they often come with lower interest rates. This is one of the biggest reasons to choose a conforming loan: they’re more likely to be cheaper.

There are a few smaller perks as well. Since the process is so standardized, it also means you’re less likely to have any curve balls thrown your way, such as weird lender requirements. And since Fannie Mae and Freddie Mac own such a large amount of mortgages and it falls loosely under the purview of the government, you could get some additional federal protections too.

For example, during the Covid pandemic, there was a federal moratorium placed on foreclosures for homes with conforming mortgages. If yours wasn’t a conforming loan and wasn’t covered under other federal foreclosure moratorium programs (such as for FHA loans), you could be at risk of foreclosure during this time. In this case, your lender would be free to foreclose on your home if you don’t pay, even if it wasn’t your fault.

Conforming Loan Drawbacks

Most people will be best served by a conforming loan, but there are some cases where this isn’t true, which we will cover in the following sections.

Conforming Loans May Not Be Enough, Especially in High-cost Areas

If you’re looking to buy an expensive house, you might find that you need to borrow more money than a conforming loan can offer. The median home price in the U.S. is $217,500—well below the $548,250 loan limit threshold in most of the country. Thus, for most of the country, a conforming loan will usually cover all but the fanciest of houses.

But as you move into higher cost-of-living areas, more homes will fall above those limits, even as they’re adjusted higher to compensate for this. For example, the median home price in San Francisco is $1,097,800—well above the $822,375 conforming loan limit in this area.

You Might Be Better Off With a Government-backed Loan

There are a lot of government mortgage programs to help people afford a house who might not otherwise be able to. For example, VA loans help servicemembers and veterans afford homes and USDA loans help lower-income consumers living in primarily rural areas afford homes. And FHA loans can be very beneficial if you don’t have as much savings, or if your credit score could use some work.

In any case, if you choose a conforming loan, you won’t be able to take advantage of these special programs. On the flip side, while these special loans can get you into a home faster, they can also be more expensive since they usually come with additional fees.

What Is a Non-conforming Loan?

A non-conforming loan is simply any mortgage that doesn’t conform to the requirements set forth by Fannie Mae and Freddie Mac. Non-conforming loans commonly include jumbo loans (those above Fannie Mae and Freddie Mac limits) and government-backed loans like VA loans, FHA loans or USDA loans.

Non-Conforming Loan Requirements

If you’re targeting a non-conforming loan, the requirements vary a lot more by the type of mortgage you’re applying for, and the lender you’re applying with. The requirements for a VA loan, for example, might be very different than for a jumbo loan. But in general, here’s how they might compare:

  • Minimum credit score: 580
  • Maximum loan limits: Varies by program and lender
  • Maximum debt-to-income ratio: Varies by program and lender
  • Minimum down payment required: Varies by program and lender, but you may be more likely to be approved with a down payment of at least 20%.

Non-conforming Loan Benefits

The biggest benefit of non-conforming loans is that you can afford a more expensive home, if you’re going for a jumbo mortgage. Non-conforming loans can also be handy if you’re looking for one of the government-backed loan programs, including VA loans, USDA loans or FHA loans.

If everyone was limited to applying for just conforming loans, we wouldn’t see as many people buying more expensive houses—or, conversely, low-income, rural or military homeowners either. Non-conforming loans are more applicable to people who fall outside of the civilian middle class, whether they be lower-income, higher-income or a military member.

Non-conforming Loan Drawbacks

Since lenders can’t sell non-conforming loans to Fannie Mae or Freddie Mac to free up their cash, they’re a bit riskier for the lender. This is especially true for jumbo loans, which aren’t backed by any government guarantees. If you default on a jumbo loan, it’s a huge blow to the lender.

Thus, lenders generally charge higher interest rates to compensate, and they can have even more requirements. For example, lenders who give out jumbo loans often require that you make a down payment of at least 20% and show that you have at least six months’ worth of cash in reserve, if not more.

Conforming vs. Non-conforming Loan: Which is Best for Me?

If you’re looking to buy a reasonably-priced house and don’t need any of the special government-backed mortgage programs, it’s usually best to go with a conforming loan because it’s cheaper overall. But if you’re looking to borrow a lot of money, or if you really could use those special government-backed mortgages, a non-conforming loan may be in your future.