DEFINITION of Conforming Loan Limit
Conforming loan limit is the limit on the size of a mortgage that Fannie Mae and Freddie Mac will purchase and/or guarantee. The conforming loan limit is set annually by Fannie Mae's and Freddie Mac's federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO uses the October-to-October percentage increase/decrease in the average house price in the monthly interest rate survey of the Federal Housing Finance Board (FHFB) to adjust the conforming loan limits for the subsequent year.
BREAKING DOWN Conforming Loan Limit
Mortgages that exceed the conforming loan limit are known as jumbo mortgages. The interest rate on jumbo mortgages can be higher than the interest rate on 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 possibly using secondary financing to qualify for a conforming mortgage verses a jumbo mortgage.
Exceptions to the Conforming Loan Limit
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 than the national baseline loan limit. 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.
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 tends to be notably higher than the limits for the domestic U.S. because they are designated as high-cost areas.
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.
When the conforming loan limits were set by the Housing and Economic Recovery Act, they were first established with a baseline loan limit of $417,000. The federal legislation went on to mandate that, after the housing market experienced a period of price declines, that baseline loan limit could not increase again until home prices in the market returned to their levels prior to the decline.