1. What is a Conforming Loan Limit?
The conforming loan limit is the dollar cap on a home mortgage that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) will purchase or guarantee.
Loans above this limit are known as jumbo loans.
Due to house price appreciation this past year, most of the country will see an increase in the conforming loan limit in 2021.
The national conforming loan limit as of January 1, 2021, will be $548,250. However, in the higher cost areas of the United States, the loan limit ceiling will increase from $765,600 to $822,375.
2. How Does the Conforming Loan Limit Work?
The conforming loan limit is designated by county. Most counties are assigned a 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 foras a multiple of the area’s median home value. This legislation also set a ceiling on the loan limit to no more than 150% of the baseline limit.
3. What is the History?
The Housing and Economic Recovery Act (HERA) requires that the baseline CLL be adjusted each year for Fannie Mae and Freddie Mac to reflect the change in the average U.S. home price.
The national conforming loan limit for mortgages that finance single-family one-unit properties increased from $33,000 in the early 1970s to $417,000 for 2006-2008. Also, there were limits 50%higher for four high-cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
Since 2008, various legislative acts increased the loan limits in certain high-cost areas in the United States.
4. What are the New Conforming Loan Limits for 2021?
For 2021, the baseline conforming loan limit for one-unit properties is $548,250, an increase from $510,400 in 2020. Also, the new ceiling loan limit for one-unit properties in high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands is $822,375. This is 150% of $548,250.
When announcing the new loan limits in November, the FHFA noted that the maximum conforming loan limit would be higher in 2021 in all but 18 counties. For 2019, it was higher in all but 47 counties.
5. Special Considerations
Traditional lenders often prefer to work with mortgages that meet the conforming loan limits because they are insured and easier to sell.
So, as a borrower, if your mortgage amount slightly exceeds the conforming loan limit, you should look into reducing loan size. This can be done with a larger down payment or secondary financing, to ensure that you qualify for a conforming mortgage.
When buying a house, a conforming loan can be advantageous because it meets specific criteria and will have lower interest rates than nonconforming loans. However, conforming loans must meet several requirements, most importantly the conforming loan limit.
Be sure to ask your lender for guidance along the way if you have any questions regarding conforming loan limits!