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Conforming & Nonconforming Loans: Here's the Difference

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There are two primary types of mortgage loans: conforming loans and nonconforming loans. Conforming loans typically come with lower interest rates, but they aren't available to everyone. You must meet certain requirements and there are maximum borrowing limits. This guide will explain conforming vs. nonconforming loans so you can understand both options.

What is a conforming loan?

A conforming loan meets standards set by Fannie Mae and Freddie Mac, as well as by the Federal Housing Finance Agency (FHFA) that regulates them.

Fannie Mae and Freddie Mac are government-sponsored entities (GSEs). They're the largest purchasers of mortgage loans on the secondary mortgage market. Lenders often prefer the flexibility that comes from being able to easily resell loans. They don't have to manage them in house and are free to make more loans.

Fannie Mae and Freddie Mac's standards govern the maximum mortgage loan limit, required credit score and debt-to-income (DTI) ratio, maximum loan-to-value ratio, and minimum down payment.

Conforming loans are not the same as conventional loans. Conventional loans refer broadly to all non-government-backed loans. Some, but not all, conventional loans are conforming loans.

What is a nonconforming loan?

A nonconforming loan does not meet standards set by Fannie Mae or Freddie Mac. As such, it's not eligible for purchase by these GSEs. Mortgage lenders who make nonconforming loans must keep them on their own books and manage them in house. Or they must find other investors to purchase them.

There are many types of nonconforming loans. For example, a subprime loan, FHA loan, or jumbo loan. Jumbo loans exceed Fannie and Freddie's loan limits. They are an especially common type of nonconforming loan.

How does a conforming loan work?

A conforming mortgage meets the requirements set by Fannie Mae and Freddie Mac. To qualify for a conforming loan:

  • Your loan must be below the FHFA's maximum limits. In most parts of the country, the 2021 conforming limit is $548,250. In high-cost areas, loan limits are higher, but cannot exceed $822,375.
  • Your credit score must be above 620. To qualify for the best rates, you'll need a good or even excellent credit score.
  • You must make a down payment. This could be as low as 3%. However, if you put down less than 20%, you'll generally need to pay private mortgage insurance.
  • Your DTI ratio must be below either 36% or 45% depending on a number of factors. In some cases, it could be up to 50% with compensating factors such as a high credit score.

Lenders review your financial information to determine if you qualify for a conforming home loan. If you don't, you may have other borrowing options, such as a government-insured loan or a jumbo mortgage. Use a mortgage calculator to work out your monthly payment for the various types of loans you may qualify for.

How does a nonconforming loan work?

Nonconforming loans don't meet Fannie Mae and Freddie Mac purchase guidelines. If you don't qualify for a conforming loan, you'll need a lender that offers alternatives.

There are many types of nonconforming loans. These include:

  • A subprime loan
  • A jumbo loan with higher loan limits
  • Government-backed loans such as an FHA loan, VA loan, or USDA loan

The requirements for nonconforming loans vary by loan type. For example, many lenders require larger down payments and better credit for jumbo loans because of the large loan size. In contrast, government-backed loans can be easier to qualify for. But they may come with additional fees, such as upfront funding fees for VA loans. Bad-credit home loans cater to borrows without the credentials to get a conforming loan, but interest rates are usually very high.

Conforming vs. nonconforming loans

Conforming and nonconforming loans each have their own set of advantages and disadvantages.

Conforming loan pros

  • Conforming loans are widely available. Almost all lenders offer them.
  • They often come with lower mortgage interest rates and fees. Especially compared with nonconforming alternatives.
  • Qualifying requirements are clear. Lenders largely follow Fannie and Freddie guidelines, so it's easy to see if you qualify.

Conforming loan cons

  • You can't borrow above loan limits. If you want to buy a more expensive home, you won't be able to use a conforming loan.
  • You won't qualify with poor credit or a high DTI ratio. If you aren't a well-qualified borrower, a conforming loan may not be an option.

Nonconforming loan pros

  • Lenders have more flexibility. It may be possible to qualify for a nonconforming loan even if you don't meet Fannie Mae and Freddie Mac's requirements. Look for lenders for first-time home buyers, those working with bad-credit borrowers, or lenders specializing in jumbo loans to explore options.
  • You can borrow a larger amount of money. If you qualify for a jumbo loan that exceeds Fannie Mae and Freddie Mac limits, you can borrow to buy a more expensive home.

Nonconforming loan cons

  • Interest rates and fees are often higher than conforming loans. The lender may take on more risk with a nonconforming loan, and so charge higher rates.
  • Some nonconforming loans can be harder to qualify for. Unlike government-backed loans, which are often easier to obtain than conforming loans, jumbo loans can be more difficult. Lenders generally require a higher down payment and better credit to secure a jumbo loan.

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  • A conforming loan meets requirements set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored entities and are the largest buyers of mortgage debt on the secondary market. They will only purchase loans that meet certain criteria. These include maximum loan limits ($548,250 in 2021 for most parts of the country).

  • A nonconforming loan is any loan that doesn't meet the Fannie Mae and Freddie Mac purchase criteria. Government-backed loans and jumbo loans are two of the most common types of nonconforming loans.

  • Conforming loans meet requirements set by Fannie Mae and Freddie Mac. They are conventional loans (not backed by the government) and fall below certain loan limits. Borrowers must generally have a credit score of 620 or higher and a DTI ratio below 45% to qualify for a conforming loan.

    Conforming loans typically offer a lower interest rate and there may be fewer upfront fees than for jumbo loans or government-backed mortgages. Nonconforming loans don't meet Fannie Mae and Freddie Mac requirements. It can be harder to find a lender offering nonconforming loans, and it may be more difficult to get approved for some nonconforming loans, such as jumbo loans.

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