Conforming Loans
A conforming loan is a mortgage that meets the dollar limits set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Fannie Mae and Freddie Mac. For borrowers with excellent credit, conforming loans are advantageous due to their low interest rates.
KEY TAKEAWAYS
A conforming loan is a mortgage with terms and conditions that meet the funding criteria of Fannie Mae and Freddie Mac.
Conforming loans cannot exceed a certain dollar limit, which changes from year to year. In 2022, the limit is $647,200 for most parts of the U.S. but is higher in some more expensive areas.
Conforming loans typically offer lower interest rates than other types of mortgages.
Lenders prefer to issue conforming loans because they can be packaged and sold in the secondary mortgage market.
Conforming Loan Limits 2022
The term “conforming” is most often used when speaking specifically about the mortgage amount, which must fall under a certain dollar figure, known as the conforming loan limit, which is set each year by the FHFA.
For 2022, this baseline limit is $647,200 for most of the United States. In some high-cost markets, such as San Francisco and New York City, the limit is higher. The 2022 ceiling for these areas is $970,800, or 150% of $647,200
Other Conforming Loan Rules
Besides the size of the loan, other guidelines to which conforming loans must adhere include the borrower’s loan-to-value ratio (which takes into account the size of the down payment), debt-to-income ratio, credit score and history, and certain documentation requirements.
Advantages of Conforming Loans
For consumers, conforming loans are advantageous due to their low interest rates. For first-time homebuyers taking out Federal Housing Administration (FHA) loans, for example, the down payment can be as low as 3.5%. However, the buyer who makes a low down payment may be required to purchase mortgage insurance, the cost of which varies according to their loan’s terms. For example, for 30-year loans of $625,500 or less, with an LTV ratio greater than 95%, the cost is about 0.85% of the loan amount per year.