How Conforming Loan Limits are Set

How Conforming Loan Limits are Set

You’ve heard the terms “jumbo” and “conforming loan limits” but there might be those who aren’t completely sure what both of those terms mean, especially so if you’re not in the mortgage industry. But they are important as it relates to loan choices, rates and fees. By far the conventional mortgage using guidelines set forth by Fannie Mae and Freddie Mac take up most of the market share, garnering nearly two-thirds of loan originations made today. You’d be hard-pressed to find any mortgage company that does not offer a conventional loan. These loans will also carry the most competitive interest rates compared to other types of home loans. Such loans also carry certain requirements to meet Fannie and Freddie guidelines and one of the most important is the maximum loan limit.

How it Works

Today, the maximum loan limit for most parts of the country is $424,100. In areas where the median home values are higher compared to other areas the maximum conforming loan limit can be as high as $636,150. Lenders refer to loans that fit into this higher limit as a “high balance” conforming loan. Any loan amount above the conforming maximum is then considered a jumbo loan which will then carry slightly higher interest rates and in most cases a higher down payment requirement. There may also be higher credit score requirements as well. But who sets the conforming loan limits? How often can they change?

In the latter part of 2008, Congress passed the Housing and Economic Recovery Act of 2008, or HERA. As part of this Act, the Federal Housing Finance Agency was created and issued authority to provide lending guidelines and oversight of Fannie Mae and Freddie Mac. One of FHFA’s jobs is to set the conforming loan limit for Fannie and Freddie loans. The Agency established that the new loan limits for the following year would be based upon the increase in median home values nationally in October and compared to October of the previous year. As such, if home values do increase by say 5%, the conforming loan limit for the following year would then be increased by the same amount.

Loan Limits Today

Yet because it took so long for home values to recover their losses from 2008 to 2016, the loan limit stayed the same at $417,000. FHFA did not allow for the conforming loan limits to fall in case home values also fell but allowed the limits to remain the same. That’s why we didn’t see any increase in the conforming loan limit during that time. But we did for 2017 and we most likely will for 2018. In fact, FHFA should be making the announcement before the end of this month, perhaps even before Thanksgiving. But this shouldn’t hold anyone back from buying a home or consider a refinance.

Final Takeaway

Mortgage rates have gradually been on the rise over the past year and there is little evidence the Federal Reserve Board will act and lower rates. In fact, just the opposite is the industry’s expectation. Yet as it relates to loan limits, we’ll likely see yet again another slight increase for the following year.