For the sake of simplicity, a “conforming mortgage” is a home loan with a loan amount up to $510,400 that also fits underwriting guidelines set forth by Fannie Mae and Freddie Mac. This maximum increased from $484,350 in 2019.
Conforming Loan Requirements
- The loan must meet qualifying guidelines set by Fannie Mae or Freddie Mac
- Including minimum credit score requirements (generally 620 FICO)
- Along with other key underwriting criteria
- Most importantly the loan amount must be at/below the conforming loan limit
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.
In other words, you should be able to get a cheaper mortgage rate, all else being equal, if your mortgage conforms to Fannie and Freddie’s standards.
For this reason, borrowers will often put more money down to stay under this important loan limit, or get a combo loan and keep the first in conforming territory. Doing so will allow them to get a lower rate and/or expand their financing options as more lenders offer conforming loans than jumbo.
Aside from loan amount, Fannie and Freddie require a minimum FICO score of 620 unless a special circumstance (like non-traditional credit) applies. This is perhaps one of their most important qualifying criterion other than loan size.
If the loan exceeds the loan limit or doesn’t meet the guidelines of Fannie or Freddie, it is known as a non-conforming loan. In this case, you may need to seek out a portfolio lender or look to government programs like FHA/VA/USDA, which have lower credit score requirements.
When Does the Conforming Loan Limit Change?
- It doesn’t change every year
- But any changes are announced in November
- Based on October-to-October home price movement
- And go into effect the following January
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 2020 conforming loan limits for properties in the contiguous United States:
One-unit properties: $510,400
Two-unit properties: $653,550
Three-unit properties: $789,950
Four-unit properties: $981,700
*For one-unit properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limit is $765,600, which is 50% higher than the baseline.
High-Cost Loan Limits for Conforming Loans
- In certain expensive cities throughout the country
- It’s possible to take advantage of high-cost loan limits
- These loan amounts exceed the conforming loan limit
- But still aren’t considered jumbo loans
The Economic Stimulus Act of 2008 temporarily increased the conforming loan limit in high-cost areas, pushing it to as much as $765,600 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 $765,600 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 $510,400. If you do the math, 50% of $510,400 is $255,200, and added together you get $765,600.
The old $729,750 figure you may have come across was derived by allowing loan limits of 125% of the area median home value, up to 75% above the former $417,000 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 2020 high-cost loan limits for properties in the contiguous United States:
One-unit properties: $765,600
Two-unit properties: $980,325
Three-unit properties: $1,184,925
Four-unit properties: $1,472,550
*Alaska, Hawaii, Guam, and the U.S. Virgin Islands do not have high-cost areas in 2020.
Use Combo Loans to Stay Under the Conforming Loan Limit
- Some savvy borrowers will break their loan amount into two
- With a first and second mortgage instead of just one loan
- Keeping the first at/below the conforming loan limit to save money
- This may result in a lower interest rate thanks to a lower LTV and a conforming loan amount
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 $510,400 (or $765,600 in a high-cost area), you can add a second mortgage behind it without breaking the conforming limit.
However, there is also a second mortgage loan limit set forth by the FHFA, which was $226,550 in 2019. It’s unclear if it’ll change in 2020.
Also keep in mind 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.
We’ll see if the conforming loan limit increases again in 2021…it probably will with home prices still appreciating fairly rapidly.