Conforming loan limit

What Is Conforming Loan Limit?

A conforming loan limit defines the maximum size for a conventional loan that government-sponsored enterprises (GSEs), primarily Fannie Mae and Freddie Mac, are legally permitted to purchase or guarantee. This threshold is a crucial component of mortgage finance in the United States, influencing the types of loans available to homebuyers and the dynamics of the housing market. Mortgages that adhere to these limits, along with other underwriting guidelines set by the GSEs, are known as conforming loans. These limits are adjusted annually by the Federal Housing Finance Agency (FHFA) to reflect changes in average home prices across the country.

History and Origin

The concept of a conforming loan limit originated with the establishment of Fannie Mae in 1938 and later Freddie Mac in 1970. These government-sponsored enterprises were created to provide liquidity, stability, and affordability to the U.S. housing market by purchasing mortgages from lenders, thereby allowing lenders to free up capital for new loans. Initially, the loan limits were relatively low. For instance, the national conforming loan limit for a one-unit property was $33,000 in the early 1970s.¹⁸, ¹⁹

A significant turning point occurred with the passage of the Housing and Economic Recovery Act (HERA) in 2008. In response to the financial crisis, HERA established a permanent formula for the annual adjustment of conforming loan limits. This legislation mandated that the FHFA adjust the baseline conforming loan limit each year to reflect changes in the average U.S. home price, ensuring that the limits remained relevant to market conditions.¹⁷ This move institutionalized the annual review and adjustment process, making the conforming loan limit a dynamic figure tied to real estate market fluctuations.

Key Takeaways

• A conforming loan limit is the maximum loan amount for mortgages that Fannie Mae and Freddie Mac can acquire.
• The Federal Housing Finance Agency (FHFA) sets these limits annually, typically increasing them to reflect rising home prices.
• Loans that exceed the conforming loan limit are known as jumbo loans and usually come with different lending criteria and potentially higher interest rates.
• Adherence to the conforming loan limit often allows lenders to sell mortgages to Fannie Mae and Freddie Mac, which provides liquidity to the mortgage market and generally results in more favorable terms for borrowers.
• There are higher conforming loan limits for properties in designated high-cost areas and certain U.S. territories.

Formula and Calculation

While there isn't a simple mathematical formula for individual borrowers to calculate their conforming loan limit, the FHFA determines the baseline conforming loan limit annually using a specific statutory formula established by the Housing and Economic Recovery Act (HERA). HERA requires the FHFA to adjust the baseline loan limit to reflect the percentage change in the average U.S. home price. This adjustment is based on the FHFA House Price Index (FHFA HPI), specifically the nominal, seasonally adjusted, expanded-data version, which tracks home price movements between the third quarters of successive years.¹⁶

For instance, if the average U.S. home price increases by 5.56% from Q3 2022 to Q3 2023, the baseline conforming loan limit for 2024 would also increase by 5.56%.¹⁵

In addition to the baseline limit, the FHFA also sets higher limits for designated "high-cost areas" where 115% of the local median home value exceeds the baseline limit. These high-cost area limits can go up to 150% of the baseline limit.¹⁴ Special statutory provisions also apply to Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the baseline limits are set at the maximum high-cost area ceiling.¹³

For 2025, the baseline conforming loan limit for a one-unit property in most areas of the U.S. is \($806,500\). In high-cost areas, this limit can be as high as \($1,209,750\).¹²

Interpreting the Conforming Loan Limit

The conforming loan limit acts as a critical benchmark in the mortgage lending industry. Its interpretation primarily centers on whether a mortgage loan qualifies for purchase by Fannie Mae and Freddie Mac. A loan amount at or below the current conforming loan limit means the loan is eligible for acquisition by these GSEs, assuming all other underwriting guidelines are met. This eligibility is significant because it provides a reliable avenue for lenders to sell off their mortgages, replenishing their capital and allowing them to issue more loans.

For homebuyers, understanding the conforming loan limit is crucial when evaluating their financing options. A loan within these limits is generally a conventional loan and may offer more competitive interest rates and easier qualification compared to a non-conforming, or jumbo, loan. Conversely, if a desired home requires a mortgage amount exceeding the conforming loan limit for that specific county, the borrower will need to pursue alternative financing, such as a jumbo loan, which typically has stricter qualification criteria.

Hypothetical Example

Consider a prospective homebuyer, Sarah, who is looking to purchase a single-family home in a county where the 2025 baseline conforming loan limit is \($806,500\).

• Scenario 1: Conforming Loan
  Sarah finds a home priced at \($750,000\). After making a down payment of \($150,000\) (20% of the purchase price), she needs a mortgage of \($600,000\). Since \($600,000\) is less than the \($806,500\) conforming loan limit, her loan would be classified as a conforming loan, assuming she meets other criteria like credit score and debt-to-income ratio. This makes it eligible for purchase by Fannie Mae or Freddie Mac, potentially offering her more favorable terms.

• Scenario 2: Non-Conforming (Jumbo) Loan
  Alternatively, Sarah finds a home priced at \($1,100,000\) in the same county. With a 20% down payment of \($220,000\), she would need a mortgage of \($880,000\). This amount exceeds the \($806,500\) conforming loan limit for her county. Therefore, her mortgage would be considered a jumbo loan. To secure this loan, Sarah might face higher interest rates, stricter credit requirements, and a larger down payment, as these loans are not typically purchased by the GSEs and thus carry more risk for the originating lender.

Practical Applications

Conforming loan limits have several practical applications across the real estate and financial sectors:

• Mortgage Accessibility and Affordability: By setting a maximum loan amount that can be bought or guaranteed by Fannie Mae and Freddie Mac, the conforming loan limit helps ensure a liquid and stable secondary mortgage market. This enables lenders to offer more mortgages, often with lower interest rates, to a broader range of borrowers. The ability of lenders to sell mortgage-backed securities minimizes their risk, making them more willing to lend.¹¹
• Defining Loan Products: These limits are fundamental in distinguishing between conventional conforming loans and jumbo loans. This distinction affects loan pricing, underwriting guidelines, and borrower qualification requirements. Lenders tailor their product offerings based on these limits.⁹, ¹⁰
• Real Estate Market Analysis: The annual adjustments to conforming loan limits reflect changes in national and local home values. This information is often used by real estate professionals, economists, and policymakers to gauge housing market trends and assess affordability. The Federal Housing Finance Agency (FHFA) publishes these limits annually, along with historical data, which provides insight into housing price evolution.⁸
• Policy and Regulation: The Federal Housing Finance Agency, as the regulator of Fannie Mae and Freddie Mac, uses these limits as a tool to manage the exposure of the government-sponsored enterprises to mortgage risk and to fulfill their mission of promoting homeownership. The FHFA provides comprehensive data and announcements regarding the limits.⁷

Limitations and Criticisms

While conforming loan limits serve to stabilize the housing market and promote liquidity, they also face certain limitations and criticisms:

• Market Distortion: Critics argue that conforming loan limits, particularly the increases in high-cost areas, can unintentionally contribute to rising home prices. By expanding the pool of loans eligible for GSE backing, it might enable buyers to afford more expensive homes, thus potentially driving up demand and prices, especially in competitive markets. However, research by the FHFA suggests that these increases have not necessarily led to the GSEs supporting disproportionately higher-end homes within local markets, maintaining a consistent relationship since the Housing and Economic Recovery Act of 2008.⁶
• "Hard Cap" Effect: For properties priced just above the conforming loan limit, borrowers may face a sudden jump in lending costs and stricter qualification requirements, as their loan transitions from a conforming loan to a jumbo loan. This "hard cap" can create a challenging financing gap for some homebuyers.
• Regional Disparities: Although there are higher limits for high-cost areas, some argue that these adjustments may not fully capture the nuances of hyper-local real estate markets. Even within a broad "high-cost" designation, specific neighborhoods can have vastly different average home values, leading to situations where the conforming loan limit might still feel restrictive for certain buyers.
• Impact on Innovation: The standardization imposed by Fannie Mae and Freddie Mac's underwriting guidelines and loan limits, while promoting efficiency, could potentially stifle innovation in mortgage product development outside of the conforming market.

Conforming Loan Limit vs. Jumbo Loan

The distinction between a conforming loan limit and a jumbo loan is fundamental in mortgage finance.

The primary point of confusion arises because both are types of conventional loans—meaning they are not directly insured or guaranteed by government agencies like the FHA, VA, or USDA. However, the critical differentiator is whether the loan amount falls within the limits set for purchase by Fannie Mae and Freddie Mac.

FAQs

Who sets the conforming loan limits?

The Federal Housing Finance Agency (FHFA) is responsible for setting the conforming loan limits annually. They announce these limits in November for the upcoming year.

⁵### How often do conforming loan limits change?
Conforming loan limits are adjusted annually. The adjustment is based on the year-over-year percentage change in the average U.S. home price, as measured by the FHFA House Price Index.

⁴### Are conforming loan limits the same across the entire U.S.?
No, conforming loan limits vary across the U.S. While there is a national baseline limit for most areas, higher limits are set for designated "high-cost areas" where median home values significantly exceed the national average. Additionally, Alaska, Hawaii, Guam, and the U.S. Virgin Islands have unique, higher baseline limits due to special statutory provisions.

², ³### Why do lenders prefer conforming loans?
Lenders often prefer to originate conforming loans because they can be sold to Fannie Mae and Freddie Mac in the secondary mortgage market. This process allows lenders to replenish their funds quickly, enabling them to issue more loans and manage their risk exposure effectively.¹