Conforming Mortgage Loans

For the sake of simplicity, a “conforming mortgage” is a home loan with a loan amount up to $417,000 that also fits guidelines set forth by Fannie Mae and Freddie Mac.

Because conforming home 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.

As a result, mortgages with conforming loan amounts tend to carry lower mortgage rates than jumbo loans (those above the conforming loan limit) because of enhanced liquidity and strong investor demand.

When Does the Conforming Loan Limit Change?

The conforming loan limit changes annually, as determined by the FHFA, based on October-to-October home price data.  It is announced in November and goes into effect the following January.

The Emergency Home Finance Act of 1970 originally established a conforming loan limit of $33,000 for Fannie Mae and Freddie Mac. Congress later raised the conforming limit to $60,000 for mortgages originated in 1977, and pushed it to $67,500 in 1979.

Not long after, the Housing and Community Development Act of 1980 increased the loan limit to $93,750 and tied future increases to changes in national home prices. This legislation also established loan limits for two, three, and four-unit properties.

The conforming loan limit has risen substantially in the past thirty years as housing prices have skyrocketed in the United States, but a good chunk of mortgages in major metropolitan areas are still designated as jumbo loans because the data tends to lag.

Below are the 2014 conforming loan limits for properties in the contiguous United States:

One-unit properties: $417,000
Two-unit properties: $533,850
Three-unit properties: $645,300
Four-unit properties: $801,950

*For properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limits are 50% higher.

High-Cost Conforming Loan Limits

The Economic Stimulus Act of 2008 temporarily increased the conforming loan limit in high-cost areas, pushing it to as much as $729,750 in expensive metropolitan areas of the United States such as Los Angeles.

The loan limits were increased because lenders generally only made loans backed by Fannie and Freddie (which carried an implicit government guarantee) after the mortgage crisis wiped away private capital.

In other words, it didn’t make much sense to originate a jumbo loan, as it carried far too much risk, so these higher limits ensured lenders could sell off their loans and continue lending.

These limits stayed in place until September 30, 2011, at which point the Housing and Economic Recovery Act (HERA) “permanent” loan limits kicked in, which max out at $625,500 in the contiguous United States.

To come up with the high-cost loan limits, the area loan limit is set at 115% of the median home value, up to 50% above the baseline limit, which is $417,000. If you do the math, 50% of $417,000 is $208,500, and added together you get $625,500.

The $729,750 figure was derived by allowing loan limits of 125% of the area median home value, up to 75% above the baseline limit.

These types of loans are often referred to as “conforming jumbo loans” because they conform to Fannie and Freddie’s standards despite being over the traditional conforming loan limit.

Below are the 2014 high-cost loan limits for properties in the contiguous United States:

One-unit properties: $625,500
Two-unit properties: $800,775
Three-unit properties: $967,950
Four-unit properties: $1,202,925

*For properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limits are 50% higher.

Use Combo Loans to Stay Under the Conforming Loan Limit

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 amount at $417,000 (or $625,500), you can add a second mortgage behind it without breaking the conforming limit. The second mortgage limit is $208,500.

Keep in mind, however, that second mortgages typically come with much higher mortgage rates than first mortgages, along with their own set of closing costs and fees. You may also have to deal with two different lenders at once.

Another way to avoid going jumbo is to put more money down (if you’re able to), or simply by “less house.”

Be sure to explore all options if your loan amount is close to the conforming limit as it could save (or cost) you quite a bit of money.

Read more: Conforming loans vs. jumbo loans


4 Comments

  1. Bella December 19, 2013 at 11:56 am -

    What is the conforming loan limit in California?

  2. Colin Robertson January 23, 2014 at 7:15 pm -

    It depends on the city. In high-cost regions like the Bay Area and Los Angeles it’s $625,500, but it’s as low as $417,000 in many cheaper parts of the state.

  3. Anna January 30, 2014 at 10:00 am -

    I’ve heard Jumbo loans are cheaper than conforming loans nowadays. So does it really matter if my loan amount exceeds the conforming loan limit?

  4. Colin Robertson January 31, 2014 at 10:59 am -

    This might be true in certain situations, but jumbo lenders are very strict underwriting guidelines, such as massive down payment and asset requirements and very high credit score thresholds. So even if the interest rate is indeed lower, it might be a lot more difficult to qualify. At the end of the day, a conforming loan is the easiest and generally cheapest to acquire.

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