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, the most important being the conforming loan limit.
In this article, we’ll discuss conforming loan limits, how they work and the 2020 conforming loan limits.
What Are Conforming Loan Limits?
The conforming loan limit is the dollar cap set each year for mortgages that Fannie Mae and Freddie Mac will buy or guarantee. When mortgages meet all the requirements of both agencies, they’re known as conforming loans. In November of each year, the Federal Housing Finance Agency (FHFA) sets the conforming loan limit for the following year.
Mortgages that fall under the conforming loan limit are considered conforming loans, and loans that exceed the limit are called jumbo loans. The limit is adjusted each year to reflect changes in the average U.S. home price.
How Do Conforming Loan Limits Work?
The conforming loan limit is set by The Housing and Economic Recovery Act and designated by the county. The FHFA bases each year’s restrictions on their House Price Index report. Most counties will be assigned the national baseline limit, which reflects the change in the average U.S. home price.
Because the FHFA uses the House Price Index to determine the following year’s loan limits, the annual loan increases in loan limits are automatic. Each time home prices rise, the FHFA reacts by increasing mortgage limits. This helps the mortgage industry naturally fluctuate with the housing industry.
Some areas that satisfy requirements for higher maximum conforming loan limits will be assigned higher limits. This is typically true in notably expensive metropolises where the local median home value exceeds the baseline conforming loan limit by at least 115%. These areas often include cities such as San Francisco, New York City and Washington, D.C. The ceiling on the limits in these areas is 150% of the baseline loan limit.
If your home exceeds the conforming loan limit, you have a couple of options. You can pay a higher down payment to ensure you’re not borrowing more than the conforming loan limit. Additionally, you may be eligible for a Federal Housing Administration (FHA) loan. With an FHA loan, you can take out a conforming loan and then take out an FHA loan to cover the difference in home value.
For example, let’s say you’re purchasing a home in a county that’s assigned the national baseline limit of $510,400, but the home you’re buying costs $600,000. You can make a down payment of at least $89,600 and take out a conforming loan to cover the rest. Now, let’s say you only have $50,000 for a down payment. You could then take out a conforming loan as well as an FHA loan to cover the remaining $39,600.
What’s the Conforming Loan Limit For 2020?
The conforming loan limit for 2020 is $510,400. In 2019 the limit was $484,350. The new ceiling loan limit in most high-cost areas is $765,600. This increase of over 5% reflects the increase in the average home value in the U.S.
Benefits Of Staying Within The Conforming Loan Limits
The primary advantage of a conforming loan is the lower Annual Percentage Rating (APR). The APR on a loan indicates how much a loan will cost you and includes the fees that lenders will charge you to originate your loan. Therefore, a lower APR will affect the fees and interest that you’ll pay on your loan, thus resulting in lower monthly payments and less money spent over the life of the loan.
In addition to saving money, traditional lenders prefer to work with mortgages that fall within the conforming loan limits. Fannie Mae and Freddie Mac insure these loans, so they’re safer for the lender to sell. They’re also easier for lenders to sell because they follow so many regulations.
Conforming loans through Fannie Mae and Freddie Mac aren’t restricted to primary residences. This means that if you’re in the market for a second home or investment property, you may be able to take out a conforming loan permitting that you meet the necessary qualifications.
The Bottom Line
A conforming loan is one that meets all the criteria of both Fannie Mae and Freddie Mac. One of the most important requirements is the conforming loan limit, or the annual cap on the dollar amount that a lender can guarantee. These limits are determined each year by the FHFA and are decided in large part by the average home value in the U.S.
There are many benefits to getting a conforming loan, including a lower total cost of borrowing and being able to work with favorable lenders.
If you’re in the market for a new home, apply for a mortgage now. Quicken Loans® will help you find a lender that understands your needs. Additionally, our blog is full of further information concerting conforming loans, getting the best rate on your mortgage and more.