What is a Conforming Loan Limit?

A conforming loan limit is the maximum loan amount that Freddie Mac or Fannie Mae will back for a mortgage.

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Introduction

A conforming loan limit is the dollar threshold below which a mortgage loan is considered small enough to be sold to Fannie Mae or Freddie Mac. The conforming loan limit for a one-unit property in the United States is currently $417,000. This means that any mortgage loan made for a one-unit property with a loan amount of $417,000 or less can be sold to Fannie Mae or Freddie Mac. mortgages with loan amounts greater than the limit are known as jumbo loans.

What is a Conforming Loan Limit?

A conforming loan limit is the maximum amount of money that a lender will give you to finance a home purchase. The limit varies by county and by the type of home you’re buying. In some counties, you may be able to get a jumbo loan, which is a loan that exceeds the conforming loan limit. Jumbo loans usually have higher interest rates than loans that are within the conforming loan limit.

How is the Conforming Loan Limit Determined?

The maximum loan amount for a conventional conforming loan is generally $484,350 for a single-family home, though limits may be higher in regions where home prices are higher. Jumbo loans allow you to finance more expensive homes.

How do Conforming Loan Limits Vary by County?

The Federal Housing Finance Agency (FHFA) recently announced that it would be increasing conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac in 2019. The new loan limit will be $484,350, an increase of $31,750 from the current limit of $452,700.

Loan limits are designed to ensure that Fannie Mae and Freddie Mac can continue to provide liquidity to the mortgage market by guaranteeing loans with low interest rates. In order to do so, the government-sponsored enterprises (GSEs) must be able to purchase a wide variety of loans from a wide variety of lenders.

The conforming loan limit is one way that the GSEs are able to accomplish this goal. The limit is the maximum loan amount that Fannie Mae and Freddie Mac will purchase from a lender. If a loan is for an amount above the limit, it is considered a jumbo loan and cannot be sold to the GSEs. As such, lenders are typically more hesitant to make these kinds of loans because they are harder to sell and may have higher interest rates.

The 2019 increase in the conforming loan limit is due to strong home price growth that has occurred over the last year. According to the FHFA House Price Index, home prices have risen 6.9% since the third quarter of 2017. The strong home price growth has helped push up values across the country, but especially in high-cost areas like San Francisco, New York City, and Honolulu.

How do Conforming Loan Limits Vary by County?
The conforming loan limit is set at the county level. That means that in some counties, like Los Angeles County in Southern California, the limit will be higher than in other counties like rural Montana. In high-cost counties like these, borrower can take out loans up to $726,525 with a 3% down payment before having to get a jumbo loan. In low-cost counties where home prices are much lower on average, the maximum loan amount allowed will be closer to $314,827 with a 3% down payment .

How do Conforming Loan Limits Affect Borrowers?

Borrowers who take out mortgages that exceed the conforming loan limit must pay extra interest because their loans present a greater risk to lenders. The higher loan limits are designed to offset this risk by making it more attractive for lenders to do business in areas where home prices are higher.

The limit affects borrowers in two ways:
1. It determines the maximum amount that borrowers can take out in a mortgage.
2. It determines the minimum amount of equity that borrowers must have in their home as collateral for the loan.

For example, if a borrower wants to take out a $500,000 mortgage in an area with a conforming loan limit of $625,000, they would need at least 20% equity in their home ($125,000) to qualify for the loan. If they only had 10% equity ($50,000), they would only be able to borrow $400,000.

Conclusion

In short, a conforming loan limit is the maximum size of a mortgage that can be purchased by Freddie Mac or Fannie Mae. These two government-sponsored enterprises (GSEs) provide stability and affordability to the mortgage market by buying “conforming” mortgages from lenders, thereby giving them the liquidity to make more loans.

The conforming loan limit is set each year by FHFA’s office of Federal Housing Enterprise Oversight (OFHEO) and typically rises with home prices. For 2020, the conforming loan limit for a single-family home is $510,400 in most counties across the U.S., but it goes up to $765,600 if you’re buying in a high-cost area, such as Hawaii, Manhattan or San Francisco. You can check FHFA’s website for a complete list of 2020 loan limits by county.