What Is the Conforming Loan Limit?
The conforming loan limit is the dollar cap on the size of a mortgage that the Federal National Mortgage Association (colloquially known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (aka Freddie Mac) will purchase or guarantee. Mortgages that meet the criteria for backing by the two quasi-government agencies are known as “conforming loans.”
In a NutshellWhen you borrow for a home, you may want a “conforming” loan. A loan is considered conforming when it meets specific guidelines set by two government-sponsored institutions, Fannie Mae and Freddie Mac. Getting a conforming loan can benefit you because eligibility, pricing and features are standardized; loan terms are usually reasonable; and the interest rate may be lower than on a nonconforming loan.
Under the mandates of the Housing and Economic Recovery Act (HERA) of 2008, the conforming loan limit is adjusted every year to reflect changes in the average price of a home in the U.S. The annual limit is set by Fannie Mae’s and Freddie Mac’s federal regulator, the Federal Housing Finance Agency (FHFA) and announced in November. The FHFA uses the October-to-October percentage increase/decrease in the average house price as indicated in the House Price Index report issued by the Federal Housing Finance Board (FHFB) to adjust the conforming loan limits for the subsequent year.
The appeal of conforming loans
As a borrower, once you’ve met the requirements for a conforming loan, getting approved can be easier because the bank can sell the loan. Plus, Fannie and Freddie guidelines ensure that lenders follow certain rules for issuing you a loan. Although you still need to be careful about making sure you understand loan terms, you may have a little more peace of mind than you would if you got a nonconforming loan.
How do conforming loans work?
Conforming loans are made by many different lenders, including banks of all sizes, credit unions and online lenders. The big thing conforming loans all have in common is that they must meet requirements for:
Debt-to-income ratio (the amount of debt you can have relative to your income)
While Fannie Mae and Freddie Mac set guidelines that lenders must obey for conforming loans, lenders have leeway to set their own stricter standards. This means some lenders will be choosier about whom they lend to than others, and some lenders will charge higher or lower interest rates than others.
Conforming loans are not insured or guaranteed by government agencies and, as such, are a type of conventional loan. Alternatives to conforming loans include FHA loans, VA loans and USDA loans, all of which are backed by the U.S. government to promote homeownership and have less-stringent qualifying requirements but often charge higher upfront fees or have higher mortgage insurance costs.
Borrowers need to shop around carefully among different lenders to find the right loan for them.
The reason for the increase in loan limit
Each year the Federal Housing Finance Agency (FHFA) increases or decreases the conforming loan limits so they are in line with home prices. Since FHFA’s House Price Index showed an increase of 6.9%, their conforming loan limits rose accordingly.
Changes are based on October-to-October home price movement and go into effect the following January.
Maximum Conforming Loan Limit Increases Again for 2019
Nearly all parts of the U.S. will see an increase to the maximum conforming loan amount that can be backed by Fannie Mae and Freddie Mac for 2019, according to the Federal Housing Finance Agency. The baseline conforming loan limit will rise to $484,450, a 6.9% increase over the 2018 limit. Areas with higher housing prices may have a higher conforming loan limit.
This marks the third straight year that the maximum conforming loan amount has increased after 10 years of it being steady. Conforming loan limits are based on average home prices. According to the FHFA, house prices increased 6.9% between the third quarters of 2017 and 2018, leading to conforming loan limits growing by the same amount. Conforming loan limits are also used to define FHA limits.
Conforming vs High Balance Conforming vs Jumbo Loans
Every county in the U.S. and its territories has a conforming loan limit, but some of these counties are considered high-cost areas. High-cost areas mean higher home prices, so Fannie, Freddie, and other agencies provide expanded loan levels to account for the higher prices. These expanded loan levels are called high balance conforming loans. For instance, notice the huge difference in loan limits for a one-unit home. $726,525 vs $484,350 is a $242,175 difference. That is a big advantage to borrow that much more at conforming rates when buying in one of the higher cost counties.
In the chart above, it shows the conforming loan limits 2019 as well as the 2019 high balance conforming loan limits. Usually, the interest rates for these loans are the same or close to the normal conforming loan counties.
Once the conforming or high balance threshold is exceeded by even $1, it crosses into the realm of jumbo loans. Also known as nonconforming loans (do not mistake “nonconforming” for the old B/C, bad credit loans). Jumbo loans offer excellent terms as well, but they just do not typically provide options like 3% down, renovation loans, 50% debt ratios, or creative solutions for student loans, etc., but they will finance a primary, secondary, or even rental property at historically aggressive terms and rates. Another jumbo option for military or military Veterans is a VA jumbo loan, which is an excellent tool for buying a higher end primary residence.
Bottom line: Is a conforming loan right for you?
If you’re borrowing for a home, consider a conforming loan. Conforming loans can come with a lower interest rate, plus the peace of mind of knowing your lender meets Fannie and Freddie guidelines.
Caps on borrowing make it tough to buy a home that exceeds conforming loan limits, and qualifying requirements are arguably stricter than those for an FHA, VA or USDA mortgage — so not everyone can get a conforming loan. Requirements and loan terms vary by lender, so be sure to shop around to find the right loan for you.