Mortgages come in a variety of kinds with numerous features. And that abundance of choice — fixed-rate, adjustable-rate, 15-year, 30-year, jumbo — can leave many homebuyers with spinning heads. But one option — a conforming loan — can be particularly attractive because of its more generous borrowing requirements and loan limits.
Whether you’re a first-time homebuyer, a repeat buyer, or looking to refinance, the simplicity and affordability of a conforming loan could be just what you’re looking for. Here’s what you need to know about conforming loan limits.
What is a conforming loan?
Stick with us because this is a bit confusing. Mortgages, like the homes we buy, come in many different shapes and sizes.
A conforming loan is a mortgage that meets the borrowing limits set by the Federal Housing Financing Agency (or FHFA). These limits are determined according to guidelines defined by the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). If you’re unfamiliar, Fannie Mac and Freddie Mac are two government-sponsored enterprises that work with lenders nationwide and help facilitate mortgage lending.
A conforming loan may be conventional (meaning that it is offered or backed by a private lender or Fannie Mae or Freddie Mac) or non-conventional, which is when your loan doesn’t meet traditional borrowing standards and is secured through the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), for example, instead.
What is the conforming loan limit (for 2020) and how is it determined?
Across the country, most places have one maximum loan amount for conforming loans. In 2020, the maximum conforming limit for a conventional loan for a single-family home is $510,400. But in high-cost areas, such as Washington D.C. and certain counties in California, the ceiling for conforming loans is higher: $765,000.
For example, if you’re purchasing a home in St. Louis, and need a $400,000 mortgage, a conforming loan could be an option since the amount you want to borrow falls within the conforming loan limit. But if you’re buying a townhouse in our nation’s capital and need a mortgage worth $900,000, a conforming loan isn’t an option. Instead, you could consider a jumbo mortgage.
You can look up the 2020 conforming loan limits across the U.S. on this map.
Under the mandate of the Housing and Economic Recovery Act (HERA) of 2008, the conforming loan limit is adjusted each year to reflect the changes in the average price of a home in the U.S.
If you’re pursuing a non-conventional FHA loan, a separate loan limit applies (because these mortgages don’t meet Fannie Mac or Freddie Mac guidelines). Presently, the FHA loan limit is a little over $331,000. But in some higher-cost areas of the country, the same $765,000 conforming loan limit still holds.
What is the advantage of a conventional loan?
Conforming loans are generally affordable and accessible.
Since conforming loans are typically backed by Fannie Mae or Freddie Mac, they offer borrowers benefits that other mortgages don’t. The advantages of a conforming loan include:
- Easier qualification requirements
- Can offer a lower interest rate than other home loans — especially if you’re a borrower with greater financial resources and a strong credit score
- May have ability to make a smaller initial down payment
- Some flexibility when it comes to your credit score and other requirements (like income and amount of savings) that could disqualify you from other mortgages
Is a conforming loan right for you?
A conforming loan can be well suited to many home buyers, thanks to its ease, simplicity, and affordability. Most lenders offer conforming loans, giving you the ability to shop around for the best interest rate. And if you have a high credit score, you could qualify for an even lower rate — reducing your monthly payments and the overall amount you’ll pay in interest over the course of your home loan.
Conforming loans are also an attractive option for first-time homebuyers since you can make a down payment as little as 3% (although you will have to pay for private mortgage insurance until you’ve achieved 20% equity in the property).
But if you’re purchasing an upscale property or a home in a particularly expensive area, the conforming loan limit might be too low.
With all the available options, navigating the mortgage marketplace can be a challenge. Understanding the conforming loan limits can help you make the right choice for your borrowing needs.