What is a Conforming Loan and what are its Loan Limits in 2019?

Conforming Loans

Conforming loan is a term associated with your home loan. Investopedia says a conforming loan is a mortgage that is equal to or less than the dollar amount established by the conforming-loan limit set by the Federal Housing Finance Agency (FHFA) and meets the funding criteria of Freddie Mac and Fannie Mae. For borrowers with excellent credit, conforming loans are advantageous due to the low interest rates affixed to them.

Not every conforming loan is bought by Fannie or Freddie, but most loans made in the U.S. are helped, in some way, through those entities. Fannie and Freddie purchase and securitize new mortgages that meet their criteria. In fact, between 2018 and 2028, the Congressional Budget Office expects these two entities to guarantee $12 trillion in new mortgage-backed securities.

Difference between a Conforming loan and a Non Conforming loan

Both Fannie Mae and Freddie Mac only buy conforming loans to repackage into the secondary market, making the demand for a nonconforming loan much less. Mortgages that exceed the conforming-loan limit are classified as nonconforming or jumbo mortgages. The terms and conditions of nonconforming mortgages can vary widely from lender to lender, but the mortgage rates and minimum down payment for jumbo loans are typically higher because they carry greater risk for a lender.

Conforming Loan Limits in 2019

For 2019, FHFA announced an increase to $484,350, up from $453,100 in 2018. As long as your loan is under that amount, it’s a conforming loan.

Limits are set based on an annual survey that takes into account the increase or decrease in average housing prices. As prices rise, the conforming loan limit does, too, so housing remains attainable for middle- and lower-income buyers.

There are high-cost areas that have a higher limit, though. If you live in one of these areas, like New York City or San Francisco, the limit can go up to $726,525. Additionally, there are special considerations for Alaska, Hawaii, Guam and U.S. Virgin Islands If you want to know what to expect from your own local area, the FHFA has a complete list of counties in the United States, and their conforming loan limits.

The FHFA, which sets the conforming-loan limit on an annual basis, has regulatory oversight to ensure that Fannie Mae and Freddie Mac fulfill their charters and missions of promoting homeownership for lower-income and middle-class Americans. FHFA uses the October to October percentage increase/decrease in average housing prices in the Monthly Interest Rate Survey (MIRS) to adjust the conforming-loan limits for the subsequent year.

To conduct this survey, FHFA asks a sample of mortgage lenders to report the terms and conditions on all single-family, fully amortizing, purchase-money, non-farm loans that they close during the last five business days of the month. The survey provides monthly information on interest rates, loan terms and house prices by property type, loan type (fixed rate or adjustable rate) and lender type, as well as information on 15-year and 30-year fixed-rate loans.

How Conforming Loan Works?

In short, a lender makes a loan that meets guidelines set forth by the FHFA. They know that Fannie Mae or Freddie Mac will potentially buy the loan later, so they’re willing to lend. The biggest feature of the conforming loan is the limit. In order to meet requirements, the FHFA limits the size of the loan—also reducing the risk of a default. Anything that is larger than the conforming limit is considered a jumbo loan.

However, even though the conforming loan limit is the item that receives the most attention, conforming loans also have other underwriting criteria. Suppose Fannie Mae has rules for lenders that take into account loan-to-value ratio, debt-to-income, and credit score. Lenders look at the rules set by Fannie and Freddie and then create a conforming loan it can sell later. You can buy with as little as a 3% down payment, as long as you meet credit score requirements and pay mortgage insurance. By selling mortgages to Fannie and Freddie, the lender can get them off their own balance sheets, freeing up more capital to make more loans. The idea is to help the mortgage market remain somewhat affordable and stable.

Advantages and Disadvantages of Conforming Loans

As with most financial decisions, there are always both benefits and drawbacks associated with conforming loans. You need to see into what you’re getting into so that you can make the best choice for yourself.

Main advantages are that Conforming loans can be easier to qualify for. In many cases, you get a lower interest rate and you might be able to make a smaller down payment. Also there’s some flexibility with your credit score.

The disadvantages are that Conforming loans are limited to a specific loan amount. You can’t buy certain types of property and the there are negative credit events, such as foreclosure or bankruptcy, might prevent you from getting a loan. Also it’s harder to get a conforming loan if your FICO score is below 620/

If you want to go for Conforming loan that’s ultimately your choice for as long as you’re within the loan limit and meet the basic underwriting criteria, these loans are relatively easy to qualify for, and they often provide you with the best interest rate as long as you meet credit requirements.

More questions about the 2019 conforming loan limits can be addressed to LoanLimitQuestions@fhfa.gov.

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