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."
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.
[Important: Traditional lenders widely prefer to work with mortgages that meet the conforming loan limits because they are insured and easier to sell.]
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 Housing and Economic Recovery Act 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 act that establish different loan limit calculations for states Alaska and Hawaii, as well as for United States 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 U.S. because they are designated as high-cost areas.
For 2019, in most of the U.S., the maximum conforming loan limit—the baseline—for one-unit properties is $484,350, an increase from $453,100 in 2018 (and up from $417,000 when first instituted by the Housing and Economic Recovery Act in 2008). The new ceiling loan limit for one-unit properties in most high-cost areas is $726,525 (150% of $484,350). For Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the baseline loan limit is $726,525 for one-unit properties. When announcing the new loan limits in November, the FHFA noted that the maximum conforming loan limit would be higher in 2019 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 they issue and to buy loans they wish to sell. The conforming loan limits act as guidelines for the mortgages most mainstream lenders offer. In fact, some financial institutions will only deal in conforming loans that meet the agencies' criteria.
Because lenders prefer conforming mortgages, a borrower whose mortgage amount slightly exceeds the conforming loan limit should analyze the economics of reducing his 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.