Conventional Mortgages: Conforming vs. Nonconforming Loans

Couple at home researches the differences between conforming and nonconforming loans.

There are two types of conventional mortgages out there: conforming loans and nonconforming loans. Here’s a rundown of what you need to know about the differences between the two, and how they can affect your home purchase.

What Is a Conforming Loan?

Conforming loans comply with limits and other requirements set by the federal government. By following these rules, a conforming loan can be backed by Fannie Mae and Freddie Mac, government-sponsored enterprises that guarantee mortgages.

One requirement that’s important to know is the 2022 conforming loan limit, which is $647,200 for a single-family home in most areas. In certain high-cost areas, the limit is $970,800.

Those limits might not be high enough for expensive properties, but conforming loans have other advantages, such as lower interest rates.

What Is a Nonconforming Loan?

Nonconforming loans don’t meet the requirements to be guaranteed by Fannie and Freddie, and are less standardized. As a result, eligibility and pricing can vary greatly depending on the lender.

In many cases, nonconforming loans are jumbo loans that go up to $2 million. Good credit and a high down payment are required to get this type of loan.

Other types of nonconforming loans are intended for people with poor credit and typically come with a high interest rate. These mortgages may also have risky features.

Nonconforming loans can be useful for people with complicated finances or who want to purchase an expensive home, or for properties that are difficult to appraise. But there are downsides, including stricter eligibility requirements and a higher level of risk.

Conforming vs. Nonconforming Loan: Which Is Best for Me?

If you meet the requirements, getting a conforming loan could mean paying a lower interest rate. However, if you’re buying a more expensive home, a conforming loan might not be big enough — in which case you could consider getting a nonconforming loan. Just know that the Consumer Financial Protection Bureau advises people to explore other mortgage options before choosing a nonconforming loan.

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