Conforming Loan Limit

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 (known colloquially as Fannie Mae) and the Federal Home Loan Mortgage Corp. (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.

Under the mandate 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 United States. 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 for the next year. 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 limit for the subsequent year.

How the Conforming Loan Limit Works

The conforming loan limit is designated by county. Most counties are assigned the baseline conforming loan limit. However, there can be variations on the conforming loan limit based on regional economic differences.

For example, in areas where 115% of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit for that area will be set higher. The above-mentioned HERA sets the maximum loan limit for such areas as a multiple of the area median home value. The legislation also set a ceiling on the limit of 150% of the baseline loan limit.

Southern California, South Florida, and the greater New York metropolitan area are three examples of regions in the contiguous part of the country that satisfy the requirements for higher maximum conforming loan limits.

Furthermore, there are special statutory provisions within the HERA that establish different loan limit calculations for Alaska and Hawaii, as well as for two U.S. island territories: Guam and the U.S. Virgin Islands. The conforming loan limits for those areas tend to be notably higher than the limits for the domestic United States because they are designated as high-cost areas.

Conforming Loan Limits 2021

For 2021, in most of the United States, the maximum conforming loan limit for one-unit properties (the baseline) is $548,250, an increase from $510,400 in 2020. This increase of $37,850 reflects the 7.42% average increase in housing prices from the third quarter (Q3) of 2019 to Q3 2020.

Conforming Loan Limits in High-Cost Areas in 2021

Median home values generally increased in high-cost areas in 2020, driving up the maximum loan limits in many areas. The 2021 ceiling loan limit for one-unit properties in the highest-cost areas such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands is $822,375, or 150% of $548,250.

When announcing the new loan limits in November, the FHFA noted that the maximum conforming loan limit would be higher in 2021 in all but 18 counties. For 2019, it was higher in all but 47 counties.

Special Considerations for the Conforming Loan Limit

Fannie Mae and Freddie Mac are the principal market makers in mortgages; banks and other lenders count on them to insure loans that they issue and to buy loans that they wish to sell. The conforming loan limits act as guidelines for the mortgages that most mainstream lenders offer. In fact, some financial institutions will only deal with conforming loans that meet the agencies’ criteria.

Traditional lenders widely prefer to work with mortgages that meet the conforming loan limits because they are insured and easier to sell.

Mortgages that exceed the conforming loan limit are known as nonconforming or jumbo mortgages. The interest rate on jumbo mortgages can be higher than the interest rate on conforming mortgages.

Because lenders prefer conforming mortgages, a borrower whose mortgage amount slightly exceeds the conforming loan limit should analyze the economics of reducing their loan size through a larger down payment or using secondary financing (that is, taking out two loans instead of one) to qualify for a conforming mortgage.