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If you’re searching for a mortgage in a competitive market, conforming loan limits could make or break your chances—and this year, the numbers have changed.
The Housing and Economic Recovery Act (HERA) of 2008 requires conforming loan limits (the maximum dollar amount for home loans that can be backed by government agencies) to be adjusted each year to reflect the changing housing market.
Loan limits for 2021 were raised to $548,250 in many parts of the U.S. but in some counties, they are higher. Anything above that becomes a “jumbo loan,” something that will make securing a mortgage much more complicated and expensive. Conforming loans are easier to qualify as they require a lower down payment, lower credit score, and lower cash reserves.
“It’s like two different worlds,” said Jennifer Beeston, branch manager and senior vice president of mortgage lending at Guaranteed Rate, a retail mortgage lender.
So let’s break down how these loan limits work, and how they might affect your home purchase.
What Is a Conforming Loan?
The federal government sets limits each year on the size of loans it’s willing to buy from mortgage lenders. If the loan falls within this limit, it’s a conforming loan. For 2021, the limit is $548,250, which is an increase from 2020 when the limit was $510,400. In certain high-cost areas that limit increases, up to a maximum of $822,375.
Because mortgage lenders want to have their loans backed by Fannie Mae and Freddie Mac (the government-sponsored enterprises), borrowers are usually required to fall within the conforming loan limits when taking out a mortgage. Mortgages larger than the government-set limits are known as non-conforming loans, or “jumbo loans.”
The government guarantee means that conforming loans are less risky for banks, and requirements for these loans can be less stringent. Down payments and interest rates can be lower, and you can qualify for these loans with a lower credit score.
Conforming Loan vs. Non-Conforming Loan
The main difference between a conforming loan and a non-conforming loan is flexibility. Non-comforning loans, or jumbo loans, are considered riskier for the lenders, so they often come with stricter requirements.
You can expect a minimum down payment of 20% or more, on a jumbo loan, compared to as little as 3 percent on a conforming loan. (Regardless of loan type or requirements, many financial experts and previous homebuyers recommend always putting down 20%.) You’ll also need a higher credit score and larger income to qualify for non-conforming loans.
The non-conforming loan will generally come with a higher interest rate, too, and require the borrower to have cash reserves. For today’s jumbo loan rates, see here.
Current Limits for Conforming Loans
The 2021 baseline limit for conforming loans is $548,250, which increased from $510,400 the year prior. The boost of 7.42 percent mirrors an increase by the same percentage in average U.S. home prices between 2019 and 2020.
That limit, however, is not the same everywhere in the U.S. In certain high-cost areas, the limit grows by as much as 150 percent, to $822,375.
The high-cost areas are typically around major metros with hot real estate markets. This map provided by the federal government shows exactly where each loan limit applies.
Who Sets The Loan Limits?
The limits are set each year by the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.
Limits are meant to reflect average home prices in the U.S., and are based on the agency’s annual home price index. With the housing market increasingly competitive in the year of Covid-19, it’s not surprising that conforming loan limits are rising alongside sale prices.
“There was a sizable increase this year in the max loan amount allowed for a mortgage to be a conventional loan before it needs to be a jumbo loan. This is great news for homebuyers because it offers increased flexibility when they look to purchase their next home,” said Bill Banfield, executive vice president of capital markets for Rocket Mortgage, in an email.
The increase in the loan limits, however, may not be keeping up with some especially competitive markets in the country. Angela Moorman, a residential loan originator at First Home Bank, said she’s seeing more jumbo loans due to rapidly increasing home prices in the Indianapolis area.
“It’s pushing the low, affordable housing market out of whack,” Moorman said.
If you’re counting on an affordable loan, check the conforming loan limits for your area and search for homes within that budget. Otherwise, you may end up with a more complicated and expensive mortgage.
How Does This Affect My Homebuying Process?
Most buyers, especially for their first home, count on a low down payment and favorable interest rates to make the purchase affordable. Those perks are easier to access with a conforming loan.
So before you begin your home search in earnest, make sure you check on the loan limits for your area (remember the map). This will serve as a benchmark for which homes you can purchase with less than 20% down payment and relatively easier requirements.
Be aware of how the limits change from county to county, because you might end up in jumbo loan territory without realizing it. For example, the loan limit in Monmouth County, New Jersey, is $822,375. But cross the border into Mercer County, and the limit drops back down to $548,250,
“If you’re anywhere near that edge and you think you might go over, you need to see if you qualify for jumbo,” said Beeston.
If you do end up needing a non-conforming loan, that’s okay. You’ll just need to make sure you’ve got the cash to afford the higher down payment and reserve requirements.