Conforming Loan Limits: The Ultimate Guide for Homebuyers

Unlocking Your Dream Home: Why Conforming Loan Limits Matter to Homebuyers

Embarking on the journey to your dream home is an exciting adventure, but it can also feel like navigating uncharted waters. That’s where we come in – we educate buyers on the homebuying process.
…

When it comes to buying a home, the world of mortgages can seem like a maze of jargon and rules. One important concept to grasp is the “conforming loan limit.” We’re here as your trusted real estate advisers to explain it in a way that’s easy to understand. But why should you care about these seemingly technical details?

When you’re in the market to buy a home, these limits are important because they determine:

1. Borrowing Capacity: If the price of the property you’re eyeing falls within these limits, you’re eligible for a conforming mortgage, which is generally more accessible. However, if the property’s price exceeds the limit, you might need a jumbo loan, which typically comes with higher interest rates and stricter qualification requirements.
2. Interest Rates: Conforming mortgages usually come with more favorable interest rates compared to jumbo loans. That’s because they are considered less risky for lenders and investors.
3. Lender Options: The pool of lenders offering conforming mortgages is typically larger, offering you more options when shopping for a mortgage. On the other hand, fewer lenders specialize in jumbo loans, potentially limiting your choices.

So, in a nutshell, conforming loan limits are like the financial guardrails guiding your journey toward homeownership. Understanding them can empower you to make informed decisions about your mortgage, ensuring a smoother and more affordable path to your dream home.

What are Conforming Loan Limits?

Conforming loan limits are essentially financial boundaries that dictate the maximum amount you can borrow when seeking a mortgage. Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs), purchase loans from lenders. They have rules regarding the maximum amounts on the loans that they will purchase. These loans are known as conforming mortgages.

Loans that exceed the conforming loan limit are known as jumbo loans. Conforming mortgages are typically easier to get than jumbo loans and jumbo loans have higher interest rates.

Who Sets Conforming Loan Limits?

The Federal Housing Finance Agency (FHFA) sets the conforming loan limits. The FHFA is a government agency that regulates Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that purchase mortgages from lenders.

I have often thought they sound like a great name for a rock band! But they aren’t, and to use the name might be a copyright violation? Anyway, Freddie and Fannie are often used together, but they are separate government-sponsored enterprises, GSEs.

Who is Fannie Mae?

Fannie Mae, or the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that purchases mortgages from lenders and then sells them as mortgage-backed securities (MBS) to investors. This helps to increase the availability of mortgage credit and make it easier for people to buy homes.

Fannie Mae was created by the U.S. government in 1938 during the Great Depression. The goal was to help stabilize the housing market and make it easier for people to get mortgages. Fannie Mae is a publicly traded company, but it is still subject to government oversight by the Federal Housing Finance Agency (FHFA).

Fannie Mae purchases mortgages from lenders that meet its lending standards. These mortgages can be for single-family homes, multifamily properties, or manufactured homes. Fannie Mae also offers a variety of mortgage products, including fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans.

Fannie Mae’s MBS are purchased by a variety of investors, including pension funds, insurance companies, and hedge funds. These investors are attracted to MBS because they offer a reliable stream of income. Fannie Mae guarantees the timely payment of principal and interest on its MBS, which gives investors peace of mind.

Fannie Mae plays an important role in the U.S. housing market. It helps to make mortgages more affordable and accessible, which in turn helps to boost the economy. Fannie Mae is also a major source of funding for the housing market, which helps to keep home prices stable.

Who is Freddie Mac?

Similar to Fannie Mae, Freddie Mac, or the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) that purchases mortgages from lenders and then sells them as mortgage-backed securities (MBS) to investors. This helps to increase the availability of mortgage credit and make it easier for people to buy homes.

Freddie Mac was created by the U.S. government in 1970 as a competitor to Fannie Mae. The goal was to help ensure a reliable and affordable supply of mortgage funds throughout the country. Freddie Mac is also a publicly traded company, but it is still subject to government oversight by the Federal Housing Finance Agency (FHFA).

Freddie Mac purchases mortgages from lenders that meet its lending standards. These mortgages can be for single-family homes, multifamily properties, or manufactured homes. Freddie Mac also offers a variety of mortgage products, including fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans.

Freddie Mac’s mortgage-backed securities are purchased by a variety of investors, including pension funds, insurance companies, and hedge funds. These investors are attracted to MBS because they offer a reliable stream of income. Freddie Mac guarantees the timely payment of principal and interest on its MBS, which gives investors peace of mind.

Unlike Freddie Mac, Fannie Mae is focused on single-family homes. Fannie Mae has a larger market share than Freddie Mac, and has stricter lending standards. Fannie Mae’s mortgage rates are typically slightly higher than Freddie Mac’s mortgage rates.

Back to the Top

Freddie Mac and Fannie Mae are Integral to the Mortgage Industry

Freddie Mac and Fannie Mae, both government-sponsored enterprises (GSEs), purchase loans from lenders in order to facilitate the flow of mortgage capital and promote homeownership in the United States. Here’s how they go about purchasing loans:

1. Lender Origination: The process starts with a lender originating a mortgage loan. Borrowers apply for loans through banks, credit unions, or mortgage companies. These lenders underwrite and fund the loans, which means they assess the borrower’s creditworthiness and provide the funds for the mortgage.
2. Loan Eligibility: The lender evaluates the loan to ensure it meets the eligibility criteria set by Freddie Mac and Fannie Mae. These criteria typically include factors such as loan size, borrower creditworthiness, and the type of property.
3. Loan Sale: Once the lender has funded the loan, they have the option to keep it in their portfolio or sell it on the secondary market. Many lenders choose to sell their loans to Freddie Mac and Fannie Mae for several reasons:
   • Liquidity: Selling loans allows lenders to free up capital, which they can then use to fund new loans, thereby increasing their lending capacity.
   • Risk Mitigation: By selling loans to GSEs, lenders transfer the risk associated with the loan to the GSEs. This can protect lenders from losses in case borrowers default on their mortgages.
   • Conforming Loan Limits: Loans that conform to the limits set by Freddie Mac and Fannie Mae are often more attractive to borrowers because they come with lower interest rates and more favorable terms. Selling loans to the GSEs enables lenders to offer these benefits to their customers.
4. Loan Pools: Freddie Mac and Fannie Mae purchase loans in bulk, typically in the form of loan pools. These pools consist of loans with similar characteristics, such as interest rates, terms, and credit scores. Pooling loans allows GSEs to create mortgage-backed securities (MBS) for investors.
5. Securitization: Freddie Mac and Fannie Mae bundle these loans into MBS, which are then sold to investors in the secondary market. These securities represent ownership interests in a pool of mortgages, and investors receive payments based on the interest and principal payments made by borrowers.
6. Guarantee: One of the critical roles of Freddie Mac and Fannie Mae is to guarantee the timely payment of principal and interest on the MBS they issue. This guarantee provides assurance to investors and helps maintain stability in the mortgage market.
7. Reinvestment: As borrowers make their mortgage payments, the principal and interest flow through to the investors in the MBS. Freddie Mac and Fannie Mae continually reinvest the funds from mortgage payments to purchase additional mortgages, ensuring a steady flow of capital into the mortgage market.

In summary, Freddie Mac and Fannie Mae purchase loans from lenders, bundle them into mortgage-backed securities, and provide guarantees to investors. This process helps ensure the availability of mortgage capital, promotes homeownership, which builds wealth, and maintains liquidity in the housing finance market.

How Conforming Loan Limits are Determined

The conforming loan limit is based on the median home value in each county. Counties with higher median home values have higher conforming loan limits. The FHFA uses data from the U.S. Census Bureau to determine the median home value in each county.

The conforming loan limit is adjusted each year for inflation. This means that the amount of money you can borrow with a conforming loan will increase each year. The FHFA uses the October-to-October percentage increase/decrease in the average house price, as indicated in the House Price Index report, to adjust the conforming loan limit for the subsequent year.

The conforming loan limit is also affected by the Housing and Economic Recovery Act of 2008 (HERA). HERA established a permanent formula for calculating the conforming loan limit. The formula takes into account the median home value, the national average home price, and the Consumer Price Index (CPI).

Back to the Top

What Factors Can Affect Conforming Loan Limits?

There are a few factors that can affect the conforming loan limit for a particular property:

• The location of the property: The conforming loan limit is higher in areas with higher median home values. This is because the Federal Housing Finance Agency (FHFA) uses the median home value to determine the conforming loan limit.
• The type of property: The conforming loan limit is higher for manufactured homes than for traditional stick-built homes. This is because manufactured homes are typically less expensive than traditional stick-built homes.
• The number of units in the property: The conforming loan limit is higher for properties with more than four units. This is because properties with more than four units are considered commercial properties and are not eligible for conforming loans.
• The loan-to-value ratio (LTV): The conforming loan limit is lower for loans with a higher LTV. This is because loans with a higher LTV are considered riskier and are therefore less likely to be purchased by Fannie Mae and Freddie Mac.
• The borrower’s credit score: The conforming loan limit is higher for borrowers with a higher credit score. This is because borrowers with a higher credit score are considered to be less risky and are therefore more likely to be approved for a conforming loan.

It is important to note that the conforming loan limit is just a maximum limit. Lenders may still approve loans that exceed the conforming loan limit, but these loans will be considered jumbo loans and will typically have higher interest rates.

How Conforming Loan Limits Affect Homebuyers

Conforming loan limits affect homebuyers in a few ways:

• They can limit the amount of money you can borrow. If the conforming loan limit for the property you want to buy is lower than the amount of money you need to borrow, you will need to get a jumbo loan, which typically has higher interest rates.
• They can affect the interest rate you pay. Jumbo loans typically have higher interest rates than conforming loans because they are considered to be riskier.
• They can limit your options. There are fewer lenders that offer jumbo loans, so you may have fewer options when it comes to finding a mortgage.

If you are considering buying a home, it is important to understand the conforming loan limit for the particular property you are interested in. This will help you determine how much money you can borrow and what type of mortgage you will need.

Here are some tips for homebuyers who are affected by conforming loan limits:

• Shop around for a mortgage lender. There are many lenders that offer jumbo loans, so it is important to shop around and compare interest rates.
• Get pre-approved for a mortgage. This will give you an idea of how much money you can borrow and what your monthly payments will be.
• Be prepared to make a larger down payment. Jumbo loans typically require a larger down payment than conforming loans.
• Consider other types of financing. There are other types of financing options available, such as government-backed loans, that may be a better fit for your needs.

If you are struggling to afford a home within the conforming loan limit, there are a few things you can do:

• Increase your income. This could mean getting a raise at your current job, getting a second job, or starting a side hustle.
• Reduce your expenses. This could mean cutting back on unnecessary spending, consolidating debt, or refinancing your existing debt.
• Save for a larger down payment. This will reduce the amount of money you need to borrow and lower your monthly payments.

Additional Aspects of Conforming Loan Limits

Conforming loan limits are subject to change. The FHFA may adjust the conforming loan limits each year, depending on the economic conditions. You can keep up to date with changes in loan limits, as well as see historic data about conforming loan limits at the FHFA website.

There are some exceptions to the conforming loan limit. For example, the conforming loan limit is higher for certain types of loans, such as loans for first-time homebuyers. These exceptions aim to assist individuals who are entering the housing market for the first time and may have limited resources for a down payment.

Loan limits may be higher for multi-unit properties (e.g., duplexes, triplexes, and fourplexes) compared to single-family homes. This recognizes the higher cost of purchasing and maintaining multi-unit properties.

Certain loan products offered by lenders or government agencies may have unique loan limit structures. These can include programs for energy-efficient home improvements, historic property rehabilitation, or affordable housing initiatives.

Back to the Top

What are the Current Conforming Loan Limits?

Conforming Loan Limits for 2023:

• Baseline conforming loan limit: $726,200
• High-cost conforming loan limit: $1,089,300

The baseline conforming loan limit applies to most counties in the United States. The high-cost conforming loan limit applies to counties with higher median home values.

Some of the high-cost conforming loan areas include areas like New York, with a median home value: $1,178,900 and a conforming loan limit of $1,738,400; and San Francisco, with a median home value of $1,620,000 and a conforming loan limit of $2,345,000. These counties are located in some of the most expensive real estate markets in the United States. The median home value in these counties is significantly higher than the national median home value of $428,700.

The conforming loan limits for multi-family properties in 2023:

• Baseline conforming loan limit: $582,075
• High-cost conforming loan limit: $969,825

The 2023 conforming loan limits were increased by 12.21% from the 2022 conforming loan limits.

What are Conforming Loan Limits in Maryland?

The following counties in Maryland have a high-cost conforming loan limit ($1,089,300) in 2023:

• Calvert County
• Charles County
• Frederick County
• Montgomery County
• Prince George’s County

The following counties in Maryland have a baseline conforming loan limit ($726,200) in 2023:

• Allegany County
• Anne Arundel County
• Baltimore City
• Baltimore County
• Caroline County
• Cecil County
• Dorchester County
• Garrett County
• Harford County
• Howard County
• Kent County
• Queen Anne’s County

Will Conforming Loan Limits Go Up in 2024?

Conclusion

It’s important for borrowers to check with their lenders or mortgage professionals to determine the loan limits that apply to their specific circumstances. These exceptions are subject to change and can vary by location and loan type. Borrowers should also consider factors such as creditworthiness, income, and debt when determining eligibility for loans within or beyond conforming loan limits.

Are you ready to turn your dream home into a realty? Take these steps:

1. Use an experienced, trustworthy real estate professional.
2. Compare lenders. Don’t settle for the first offer that comes your way. Shop around and find the lender who can make your dreams come true at the best possible terms.
3. Get pre-approved. Gain the upper hand by getting pre-approved. It’s your ticket to knowing exactly how much you can borrow and what your future monthly payments will look like.
4. Boost your financial game. If you’re looking to secure that dream home within conforming loan limits, consider strategies to increase your income, reduce expenses, or save for a larger down payment.
5. Stay informed. Keep an eye on the ever-changing landscape of conforming loan limits. Stay tuned for updates and be ready to seize opportunities as they arise.

Ready to embark on your journey to a new construction home? Contact our experienced real estate team today, and let’s turn your dream into reality. We’re here to provide representation and guide you through every step of the process, ensuring you make informed decisions.

Chris & Karen Highland
eXp Realty – 301-301-5119

Find Out What Your Home May Be Worth (takes 15 seconds)

Search for Homes in Central Maryland

Need A Real Estate Agent in Your City? We Can Refer a Great Agent!

Broker supervision:  888-860-7369

Back to the Top