The Difference Between Conforming and Non-Conforming Loans

7 July 2025

When it comes to buying a home, you’ll hear a lot of financial jargon thrown around. One of the most confusing? The terms conforming and non-conforming loans. I mean, sure—those words sound official, maybe even a little intimidating. But once you break them down, it’s actually not all that complicated.

So, what does it all mean? Why should you care whether your mortgage is conforming or not? And how does it affect your home-buying journey?

Let’s walk through the differences in plain English, so you can take the mystery out of the mortgage world—and make smarter decisions when it's time to pick the right loan for you.

What Is a Conforming Loan?

Let’s start with the basics. A conforming loan is a home loan that meets the guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs). These organizations were created to keep the mortgage market stable and affordable.

But to “conform" to their guidelines, the loan has to check a few specific boxes:

1. Loan Limit

Each year, the Federal Housing Finance Agency (FHFA) sets a standard loan limit. For 2024, the baseline conforming loan limit for a single-family home in most U.S. counties is $726,200. In some high-cost areas—like parts of California or New York—it can go as high as $1,089,300.

So if your loan amount falls within these limits, it's considered conforming.

2. Borrower Requirements

Conforming loans also require that you meet certain credit, income, and debt-to-income ratio benchmarks. Lenders offering conforming loans usually want:

- A credit score of at least 620 (although the higher, the better for better rates)
- A debt-to-income (DTI) ratio under 45%
- Proof of steady income and employment

Basically, you’ve gotta show you’re a good bet to pay the loan back.

3. Loan Terms and Documentation

Another key piece is that the loan structure needs to match certain standards—like loan terms (typically 15 or 30 years), interest types (fixed or adjustable), and full documentation of income and assets.

Once a loan meets all those criteria, it’s eligible for purchase by Fannie Mae or Freddie Mac. That means the original lender gets paid back fast and can use that money to offer more home loans. Think of it like a cycle that keeps the mortgage industry moving.

What Is a Non-Conforming Loan?

Now that we’ve got conforming loans down, what about non-conforming loans?

It’s simple: any loan that doesn’t meet those Fannie Mae and Freddie Mac guidelines is considered non-conforming. That could mean it exceeds the loan limits, has a borrower with a lower credit score, or includes unique terms not accepted by the GSEs.

But here’s the kicker—not all non-conforming loans are bad. In fact, sometimes they’re exactly what a buyer needs.

Let’s break this down into the main categories so you get the full picture.

Types of Non-Conforming Loans

Non-conforming loans come in a few flavors. Each is designed for a specific type of borrower or property.

1. Jumbo Loans

Probably the most common type of non-conforming loan is the jumbo loan. This is what you’ll need if you're buying a high-priced home that exceeds the conforming loan limit in your area.

With jumbo loans:

- The loan amount is higher than $726,200 (or higher in expensive zip codes)
- The underwriting is stricter (think higher credit scores and bigger down payments)
- Interest rates can be slightly higher due to the increased risk to lenders

So if you’ve got your eyes on that million-dollar house in Malibu? A jumbo loan's likely in your future.

2. Government-Backed Loans (Technically Non-Conforming)

This might surprise you, but mortgages like FHA, VA, and USDA loans are also considered non-conforming. Why? Because they don’t follow the Fannie and Freddie rules—even though they have government backing.

These programs are designed to help first-time buyers, veterans, and lower-income borrowers get into homes with:

- Lower credit score requirements
- Smaller down payments (even 0% for VA and USDA loans)
- Flexible income and DTI guidelines

So while they don’t “conform,” they’re highly accessible and often a smart choice.

3. Subprime Loans

Yup, these still exist—but they’ve changed a lot since the 2008 housing crash. Subprime loans are for buyers with poor or limited credit histories, and they often come with:

- Higher interest rates
- Larger down payment requirements
- Stricter lending terms

Because these loans are riskier, borrowers need to be extra cautious. If it sounds too good to be true…it probably is.

4. Portfolio Loans

Some lenders choose to keep loans in-house rather than sell them on the secondary market. These are called portfolio loans, and they’re often non-conforming because they don’t follow standard guidelines.

This gives lenders more flexibility to work with borrowers who might not qualify otherwise—think self-employed people, real estate investors, or those with unique financial situations.

Key Differences Between Conforming and Non-Conforming Loans

Let’s put it all side-by-side to make the contrast crystal clear:

| Feature | Conforming Loan | Non-Conforming Loan |
|-----------------------------|-----------------------------------------------------------|-------------------------------------------------------------|
| Loan Limits | Must fall within FHFA-set limits | Can exceed FHFA limits (jumbo loans, etc.) |
| Government Backing | Purchased by Fannie Mae and Freddie Mac | May be backed by the government (FHA, VA, USDA) or private |
| Borrower Requirements | Higher credit, strict income verification | More flexibility (or stricter in jumbo/subprime cases) |
| Interest Rates | Usually lower due to lower risk | May be higher depending on loan type |
| Flexibility | Less flexible – sticks to GSE guidelines | More customizable based on lender criteria |
| Down Payment | As low as 3% for qualified buyers | Often higher, especially for jumbo and subprime loans |

Why Should You Care?

Okay, real talk—why does this even matter to you, the homebuyer?

Simple: It affects how much you can borrow, what kind of home you can afford, and how much interest you’ll pay over time.

Let’s say you're buying a modest home in a typical U.S. suburb and have decent credit. A conforming loan might be your best (and cheapest) option. Lower interest rate? Yes, please. Easier to get approved? Even better.

But maybe you’re in a high-cost city, or you're a freelancer with non-traditional income. In that case, a non-conforming loan may be your only route. It’s not “bad”—it’s just different. Think of it like wearing custom-tailored clothes instead of off-the-rack. You're paying more for something that fits your unique situation.

The Pros and Cons: A Balanced Look

Let’s keep it real—there are upsides and downsides to both types of loans.

👍 Pros of Conforming Loans:

- Lower interest rates
- Easier approval process
- Lower down payment options
- Widely available

👎 Cons of Conforming Loans:

- Loan size limits restrict expensive properties
- Fixed borrower criteria (income, credit, DTI)

👍 Pros of Non-Conforming Loans:

- Flexibility for unique borrowers
- Higher loan amounts possible
- Tailored lending options

👎 Cons of Non-Conforming Loans:

- Higher interest rates
- Stricter requirements (for jumbo/subprime loans)
- Less availability and more lender-specific

Tips for Choosing the Right Loan Type

Still not sure where you fall? Here’s a quick cheat sheet to guide your decision:

1. Know Your Budget – Use a mortgage calculator to figure out what price range you're comfortable with.
2. Check Your Credit – Higher scores open more doors, especially for conforming loans.
3. Get Pre-Approved – This gives you a realistic view of what lenders will offer you.
4. Talk to a Mortgage Broker – They’re like matchmakers for home loans and can help you find the right fit.
5. Don’t Be Afraid of Non-Conforming – For some people, they're the best (or only) option available.

Remember, this isn’t a one-size-fits-all situation. What works for your neighbor might not work for you—and that’s okay.

Final Thoughts

Understanding the difference between conforming and non-conforming loans isn’t just mortgage trivia—it’s essential knowledge that can empower you to make better financial decisions when buying a home. And let’s be honest: when you're about to sign a paper for hundreds of thousands of dollars, you want to know what you're getting into.

So don’t just nod and smile next time a lender says “This is a non-conforming loan.” Ask questions. Do your homework. And most importantly—pick the loan that fits your life, not just your bank account.

Because at the end of the day, the right loan doesn’t just get you in a house. It helps you build a home.