What is a Conforming Loan in 2021

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What is a Conforming Loan?

A conforming loan is a conventional home loan that is under a limit set by the Federal Housing Finance Agency (FHFA). Being a conforming loan means that your mortgage can be purchased by Fannie Mae or Freddie Mac, which are regulated by the FHFA. If your home loan amount is over FHFA’s conforming loan limits, your mortgage is considered to be a jumbo loan. Conforming loans offer lower mortgage interest rates compared to jumbo loans.

When you get a home loan from a mortgage lender, such as a bank or credit union, what the lender is doing is originating a home loan. They may service your loan, which means that you make your monthly mortgage payments to them, but they could choose to sell your underlying mortgage off to another financial institution at the same time. If your mortgage is sold to a third party, the lien is held by that third party. Your mortgage lender will still service your loan, so who you make mortgage payments to won’t change, but the party that owns the mortgage will change.

A lender might sell home loans in order to receive back money that they can then use to lend out to other home loans. This allows the lender to originate and service home loans, while not needing to tie up money into the loans.

How do conforming loans work?

Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase home loans. The FHFA regulates Fannie Mae and Freddie Mac by only allowing them to purchase mortgages that are under a certain limit. This limit is called the conforming loan limit (CLL). 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 lenders aren’t just originating risky loans.

Conforming Loan Limits

FHFA `'`s conforming loan limits are set annually in November, with the new limits taking place on January 1st of each year. The limits are based on your geographical location (county), with annual changes based on changes in the national average home price. There is also a baseline loan limit that acts as a minimum limit amount.

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, 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 also considered to be high-cost areas.

Conforming Loan Limits 2021

Baseline Loan Limit$548,250
High-Cost Area Loan Limit$822,375

Source: FHFA

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 says that around 130 to 200 counties are high-cost areas. However, counties are not considered to be high-cost by looking at home prices only within the county. 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. However, the maximum amount that a conforming loan can be in Los Angeles will be $822,375.

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, since housing prices decreased greatly in 2007. After the price index increased above 2007 levels in 2017, the conforming loan limit finally increased 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 Loans

If the amount of your home loan is over the conforming loan limits, your loan is considered to be a jumbo loan. Jumbo loans cannot be purchased by Fannie Mae or Freddie Mac. To compensate, your mortgage lender may require a higher down payment or a highermortgage 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 will have to be at least $177,625, otherwise, it will be a jumbo loan.

VA Home Loan Limits

VA loans use the same limits as the FHFA’s conforming loan limits. If you are eligible for a VA loan with full entitlement, such as being a veteran or active servicemember and you have never held a VA loan before or if you had one and sold the property, you do not have a VA loan limit.

This means those with full entitlement can get any amount with no limit, as long as your credit history, income, and assets allow your lender to approve your VA loan. This allows you to purchase a home with 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 already have an active VA loan, if you have defaulted on a VA loan, or 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 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 loan limit is $822,375. For more information, visit our FHA loans page.

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