A “conforming mortgage,” for sake of simplicity, is any loan amount up to $417,000 for a single-family residence that fits guidelines set forth by Fannie Mae and Freddie Mac.
Because conforming loans adhere to underwriting rules set by Fannie and Freddie, which include credit and income requirements, they are considered lower risk and are more easily sold to investors in bulk on the secondary market.
When does the conforming loan limit change?
The conforming loan limit changes annually, as determined by Freddie Mac and Fannie Mae, based on October to October home price data. The conforming limit has risen substantially in the past few years as housing prices have skyrocketed in the United States, and now many home loans in major metropolitan areas exceed the conforming loan limit.
Use Combo Loans to Conform
Homeowners can avoid exceeding the conforming limit by breaking their loan up into a first and second mortgage, known as a combo mortgage.
For example, if you keep your first loan at $417,000, you can add a second mortgage behind it without breaking the conforming limit. Keep in mind, however, that second mortgages typically price higher than first mortgages and come with their own set of closing costs and fees.
Below are the conforming loan limits for other residential property types:
Two-unit properties: $533,850
Three-unit properties: $645,300
Four-unit properties: $801,950
High-Cost Conforming Loan Limits
Thanks to recent legislation, the conforming loan limit has risen to as much as $729,750 in some higher-cost regions of the United States. These types of loans are often referred to as “conforming jumbo loans.”
However, beginning January 1, 2009, the so-called “high-cost conforming loan limit” will max out at $625,500 in the most expensive areas nationwide.
For two-unit properties, the new limit is as high as $934,200
For three-unit properties, the new limit is as high as $1,129,250
For four-unit properties, the new limit is as high as $1,403,400
For properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limits are 50 percent higher.
Update: The maximum high-cost conforming limit fell back to $625,500 for a one unit property on October 1, 2011. But there’s a chance it could rise again, thanks to all the politics involved.
And here are the updated loan limits for other types of properties:
2-unit property: $800,775
3-unit property: $967,950
4-unit property: $1,202,925