What is a Conforming Loan in 2022CASAPLORERTrusted & Transparent
What You Should Know
- Fannie Mae & Freddie Mac: These two government-sponsored agencies buy mortgages from lenders and turn them into conforming loans. Other government loans like FHA loans, VA loans, and USDA loans are not classified as conforming loans.
- Conforming Loan Limit (CLL): Conforming loans have a maximum loan amount, which is the largest loan amount Fannie Mae or Freddie Mac would buy from lenders and guarantee. The 2021 limit for most counties is $548,250 on single-unit properties.
- Safer for Lenders: Lenders will generally offer lower mortgage rates on conforming loans because once Fannie Mae or Freddie Mac buy the loan, the original lender transfers nearly all of their risk on the loan to these government-sponsored agencies. If your loan does not meet conforming loan requirements, the lender will not be able to sell your loan on the secondary market.
- It Starts with the Lender: Fannie Mae and Freddie Mac set guidelines for the requirements of a mortgage loan to be purchased on the secondary market, but the loan origination process starts with your lender. This means that your lender can set different requirements and even charge different mortgage rates or fees depending on your financial circumstances.
What is a Conforming Loan?
A conforming loan starts as a conventional home loan, which is a loan that is under the limit set by the Federal Housing Finance Agency (FHFA). A conforming loan means that your mortgage is purchased by one of two FHFA-regulated agencies, Fannie Mae or Freddie Mac. If your home loan amount is over FHFA’s conforming loan limits, your mortgage is considered a jumbo loan and cannot be purchased by these agencies. Conforming loans offer lower mortgage rates compared to jumbo loans. Additionally, conforming loans are considered qualified mortgages because they tend to follow a qualified mortgage rule and ensure that the borrowers can pay them off before issuing them.
When you get a home loan from a mortgage lender, such as a bank or credit union, the lender is originating a home loan. If they service your loan, you make your monthly mortgage payments to them, but they could sell your underlying mortgage to another financial institution at the same time. If your mortgage is sold to a third party, the lien on your property is held by that third party. You will still make mortgage payments to the same lender because they are responsible for servicing the loan, but the party that owns the mortgage will change.
A lender might sell home loans to liquidate your mortgage into money that can be used to finance other home purchases. This allows the lender to originate and service home loans without needing the financial capital to support all home purchases simultaneously.
Conforming Loan Limits for All 50 States
How do conforming loans work?
Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase home loans. You need to apply for these loans from regular lenders approved by the FHFA and then your lender will sell the mortgage to Fannie Mae or Freddie Mac. If your mortgage is sold to them, you will qualify for lower mortgage rates since the risk is moved from your lender to the government-sponsored agency. While you still make monthly mortgage payments to your original lender, Fannie Mae or Freddie Mac will own the mortgage. The FHFA regulates Fannie Mae and Freddie Mac by only allowing them to purchase mortgages that meet certain requirements, like the maximum loan limit also known as the conforming loan limit (CLL), which puts a limit on how much lenders can loan out per home buyer. By purchasing mortgages and taking on the full risk associated with the loan lent out, Fannie Mae and Freddie Mac require mortgage lenders to follow certain guidelines to help ensure that they are not originating risky loans.
Conforming Loan Limits 2021
FHFA’s conforming loan limits are set annually in November, with the new limits taking effect on January 1st of each year. The limits are based on the geographical location (county) of your property, with annual changes based on changes in the national average home price. There is also a baseline loan limit that acts as a baseline loan limit.
95% of counties have a maximum home loan limit that is at the baseline loan limit. A few counties have high-cost area loan limits, which allows the conforming loan limit in those counties to be 115% of the highest median home price in the area or up to 150% of the baseline loan limit. This accounts for higher housing prices in those counties. Alaska, Hawaii, Guam, and the U.S. Virgin Islands are all considered to be high-cost areas.
Conforming Loan Limits 2021 for One-Unit Properties
|2021 One-Unit Conforming Loan Limits|
|Baseline Loan Limit||$548,250|
|High-Cost Area Loan Limit||$822,375|
The baseline loan limit of $548,250 is a 7% increase from 2020 and reflects the increase in American home prices. 95% of counties have the baseline loan limit and 3% of counties are considered high-cost areas. 2% of counties do not have either of the above loan limits but rather limits in between based on the counties’ median home prices.
Historical Conforming Loan Limits Since 2009
|Year||Baseline One-Unit Loan Limit||High-Cost Area Loan Limit|
Conforming Loan Limits by County and State
|County||State||One-Unit Limit||Two-Unit Limit||Three-Unit Limit||Four-Unit Limit|
High-Cost Areas Conforming Loan Limits
For high-cost areas, the conforming loan limit will range from the baseline of $548,250 to the maximum of $822,375. Not all high-cost areas will be at the maximum end of this range. The limit for your county will only be $822,375 if median home prices in your area are high enough to reach this limit.
Of the 3,000 counties in the United States, the FHFA classifies around 130 to 200 counties as high-cost areas. High-cost areas are not determined by looking at home prices only within the county. Instead, the FHFA groups counties into core-based statistical areas (CBSAs) and then looks at the median home values for these groups of counties. The highest median home value in each CBSA is considered, with the conforming loan limit only being higher than the baseline CLL if the highest median home value for the CBSA is greater than 115% of the baseline.
For example, the Nashville Metropolitan Area is within the Nashville-Davidson-Murfreesboro-Franklin core-based statistical area, which includes 13 counties. Since at least one county has a median home price that is greater than the 2021 baseline loan limit of $548,250, all counties within the Nashville CBSA will have a higher conforming loan limit. For 2021, the conforming loan limit for those 13 counties is $586,500.
The conforming loan limit for high-cost areas cannot exceed the 2021 limit of $822,375. For example, the median home price in Los Angeles is approaching $1 million but the maximum amount that a conforming loan can be in Los Angeles is still $822,375.
Conforming Loan Other Requirements
The most well-known conforming loan requirement is the maximum mortgage limit set by the FHFA each year. While this is the most restrictive requirement to getting a conforming loan, Fannie Mae and Freddie Mac outline other requirements on loans. Typically, your lender will check these requirements for a conventional loan as well, but it is a good idea to make sure you qualify beforehand.
- Loan-to-Value (LTV) Ratio: Your mortgage can finance up to a maximum of 97% of your total home sale price. This means that you must contribute at least a 3% down payment toward the purchase of your property.
- Maximum Income: Fannie Mae’s HomeReady Mortgage and Freddie Mac’s HomePossible Mortgage programs target low-income home buyers. Consequently, to qualify for these mortgage programs, there is an income limit equal to 80% of your county’s median income.
- Debt-to-Income (DTI) Ratio: To ensure your income can support monthly mortgage payments, you can use a maximum of 45% of your income to finance debt including the new mortgage. This means you have to add your monthly mortgage payments from the potential mortgage and monthly payments for any outstanding debt together, which is then compared to your gross monthly income.
- Minimum Credit Score: Generally, home buyers are required to have a credit score of at least 620. If your credit score is above 680, you should be eligible for discounted mortgage rates.
- Homebuyer Education: You must take either Fannie Mae or Freddie Mac’s homeownership education course or homebuyer education course respectively if all borrowers attached to the mortgage are first-time home buyers.
While Fannie Mae and Freddie Mac set these guidelines, individual lenders can set different requirements for conforming loans and could charge different interest rates. The requirements listed are the bare minimum requirements for a loan to be purchased by Fannie Mae or Freddie Mac but lenders have their requirements that more closely match their risk tolerance.
Pros and Cons of Getting a Conforming Loan
- Easier to Qualify: Conforming loans are generally easier to qualify for than other types of loans. Since lenders bear less risk with conforming loans because they can sell them, they only need to adhere to standards set by the FHFA. If a lender has to use their own money to lend you money like with a jumbo loan, their requirements will be stricter.
- Low Minimum Down Payment: With a minimum down payment of as low as 3%, these loans are very accessible to home buyers with low savings. However, if you choose to make a larger down payment, you can reduce your monthly mortgage payments, mortgage rates, and mortgage insurance. Generally, you should put as much down on a mortgage as you can comfortably afford.
- Low Mortgage Rates: Lenders prefer conforming loans because they can sell them on the secondary market, so they will usually charge lower mortgage rates to borrowers. However, some government mortgages have lower mortgage rates like VA loans or FHA loans, which have some of the lowest mortgage rates out there.
- Easily Accessible: Nearly all mortgage lenders offer conforming loans.
- Other Government Loans: Some types of government-backed loans are easier to qualify for and could offer some better benefits or rates. You should treat conforming loans as one of many options for getting a mortgage.
- Conforming Loan Limit: Within each county, there is a maximum loan amount lenders can give you before your mortgage turns into a Jumbo Loan.
- Insurance: If your down payment is for less than 20% of the total home price, you will have to pay for Private Mortgage Insurance (PMI), but this is reduced compared to conventional loans. Once you own 22% equity in your home, which means you’ve paid back 22% of your principal mortgage amount, your lender should stop charging you mortgage insurance. Some mortgages like VA loans require no mortgage insurance regardless of the down payment.
Conforming Loan Interest Rates
While we try our best to get your the best rates, we cannot guarantee that they are always accurate. Casaplorer assumes no liability for the accuracy of the information presented, and will not be held responsible for any damages resulting from its use. Rates shown are for informational purposes only. Estimated payments do not include taxes and insurance. Some state and county maximum loan amount restrictions may apply. Casaplorer is not endorsed or sponsored by any mortgage lender or government agency. Please refer to https://www.fanniemae.com/ or http://www.freddiemac.com/.
The secondary market for conforming loans is large, which means when you get a mortgage with a lender, they can easily sell it to Fannie Mae or Freddie Mac. This reduces their risk if you fall behind on your payments or default on your mortgage, which means your lender offers lower mortgage rates to encourage home buyers to stay within FHFA limits. Lowest mortgage rates set by Fannie Mae and Freddie Mac are reported on their website, but it is likely that the interest rate you receive will be higher than the one reported. It is because of loan-level pricing adjustment, which is a risk-based fee that is charged by Freddie Mac and Fannie Mae. As a rule of thumb, the riskier the borrower, the higher the loan-level pricing adjustment.
Mortgage rates shown from Fannie Mae and Freddie Mac are as reported by the respective agencies and not representative of mortgage rates you would receive on a Fannie Mae or Freddie Mac loan. The mortgage rate you receive is determined by your lender.
Can conforming loan limits decrease?
Conforming loan limits cannot decrease - limits can only increase or stay the same. CLLs will only change if the underlying FHFA house price index increases over the conforming loan limit’s high-water mark. For example, some areas have had their CLL stay the same between 2007 and 2016 even though housing prices decreased in 2007 due to the housing crisis. After the price index increased above 2007 levels in 2017, the conforming loan limit increased once again in 2017.
If a county were to fall from a high-cost area designation to a baseline value area, their conforming loan limit will also not decrease to the baseline value.
Non-Conforming Loan Limits
If the amount of your home loan is over the conforming loan limits, your loan is considered a jumbo loan. Jumbo loans cannot be purchased by Fannie Mae or Freddie Mac, so they will be held by a private lender. To compensate for the added risk, your mortgage lender may require a higher down payment or a higher mortgage rate.
The conforming loan limits apply only to the loan amount, not the price of the home that you are getting a loan for. If the conforming loan limit for your area is $822,375 but you are looking to purchase a $1 million home, you may still be able to get a conforming loan. You will need to make a down payment that reduces your home loan amount to less than $822,375. In this case, your down payment must be at least $177,625 (about 18%), otherwise, it is classified as a jumbo loan.
VA Home Loan Limits
VA loans use the same limits as the FHFA’s conforming loan limits. The VA loan limit does not apply to you if you are eligible for a VA loan with full entitlement. This applies to you if you fulfill both of the following conditions:
- You are a veteran or active servicemember
- You have never held a VA loan before or you sold the property attached to your previous VA loan
Those with full entitlement can get any loan amount with no limit, so long as your credit history, income, and assets allow your lender to approve your VA loan. You can purchase a home at any home price anywhere in the country with no down payment required.
If you have partial entitlement or no entitlement, your VA home loan limit is your county’s FHFA conforming loan limit. You will have partial entitlement if:
- You currently have a VA loan
- You have defaulted on a VA loan in the past
- You refinanced your VA loan into a non-VA loan
FHA Loan Limits
FHA loans do not follow FHFA’s conforming loan limits, but FHA loan limits do use the same median home price values. FHA loan limits use the median home price for the area, ranging from 65% for low-cost to 150% for high-cost areas. Since FHA’s high-cost areas are 150% of the baseline, this makes the maximum FHA loan limit the same as FHFA’s maximum limit for conforming loans. For 2021, FHA’s high-cost area loan limit is $822,375. For more information, visit our FHA loans page.
USDA Loan Limits
USDA loans do not have explicit home loan limits. Instead, USDA loans are restricted to home buyers with household incomes of less than 115% of your county’s median household income. This restricts the maximum mortgage loan that you can support with monthly payments. Since USDA loans are targeted toward low to moderate-income earners, maximum loan limits are unnecessary. You can verify your USDA eligibility with our USDA Eligibility Calculator.