How to Understand Conforming Loan Limits

Moshe Farber
18, Feb 2022

As a prospective homebuyer, you’re looking for the best deal you can find. That’s why it’s so important to stay up-to-date with the conforming loan limits of the Federal Housing Finance Agency (FHFA). By doing so, many homebuyers can take advantage of loans secured by Fannie Mae and Freddie Mac, and thereby benefit from lower interest rates and more favorable loan terms.  

For those not familiar with the process for applying for loans that conform to the FHFA or the benefits of being approved for one, the home buying process can be quite overwhelming. So, let’s break down the basics of conforming loans and then explore some of the latest updates to the FHFA’s loan limits for different states.

Interested in getting a great deal on your mortgage? Reach out to an Astar loan officer! We know the in’s-and-outs of buying a home. Our loan officers will hold your hand through the process of securing a loan that is right for you. Email or call 888-ASTAR-11 (888-278-2711) to start the loan application process today!

What Are Conforming Loans?

The phrase conforming loan typically refers to home loans with mortgage dollar amounts that are below the limits of the FHFA. These limits do change and they also vary depending on the state in which you are buying a house. Make sure to keep up with the latest conforming loan limits each year.

The Benefits of Conforming Loans

The reason why home buyers should consider applying for conforming loans is that they are often available at lower interest rates, down payments, and fees. For instance, homebuyers that take out conforming loans from the Federal Housing Administration (FHA) can enjoy interest rates as low as 3.5%. 

For those that aren’t familiar with the FHA loans, the Federal Housing Administration is an agency created in 1934 to help encourage homeownership by reorganizing the federal banking system. This was enacted in response to decreasing numbers of families being able to afford homes as a result of the Great Depression. The FHA became part of the Department of Housing and Urban Development in 1965. 

FHA loans offer several benefits including lower interest rates and relaxed credit requirements for borrowers. Down payments are also lower since the loan is insured by the FHA. That means that if a borrower stops paying the lender, the lender can file a claim through the FHA to get the principal of the loan paid off. In recent years, FHA loans were extended and expanded as a form of economic stimulus.

It’s important to note that there are different kinds of conforming loans. Although the term most often refers to loans that are below the amount stipulated by the FHFA, it can also be applied to loans that conform to the standards of the FHA. The standards and loan maximum amounts are different in the case of the FHA. However, these standards are influenced by the maximums set by the FHFA. 

Often, conforming loans are conventional loans, meaning non-FHA loans, that meet the standards of the FHFA and therefore qualify for lower interest rates and other benefits. 

The Secondary Mortgage Market

One of the reasons why lenders prefer to offer conforming loans and are able to offer lower interest rates for them is because conforming loans can be bundled with other loans into securitized financial products. 

These bundles of loans are sold, often by Wall Street brokers, as securities to investors. Investors are rewarded by reaping returns produced by the interest rate and fees charged on each of the mortgages bundled in the security. 

This secondary market is created by two semi-governmental entities. The first is called the Federal National Mortgage Association, also known as Fannie Mae. The second is called the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. 

One of the primary reasons why conforming loans offer such lucrative benefits to borrowers is that lenders can sell them on the secondary mortgage market if they choose.

Conforming Loan Limits by State

The maximum loan amount for conforming loans vary by state since the cost of property in some states is higher than in others. 

For most states, the baseline max loan amount is the same. However, certain states that have substantially higher property taxes have a different maximum loan amount for conforming loans. These states include Hawaii, Alaska, Guam, parts of California, and New York City.

Other Requirements for Conforming Loans

It’s important to consider that the total size of a loan isn’t the only factor that goes into determining whether it is a conforming loan or not. The loan must also be of a proper loan-to-value ratio and debt-to-income ratio to qualify as conforming. 

Finally, borrowers must also have a sufficient credit score and credit history, and present required documentation to lenders in order to qualify for a conforming loan.

Nonconforming Loans and Jumbo Loans

A home loan that does not meet the specifications to be a conforming loan is considered a nonconforming loan. 

Loans that fall outside the maximum conforming loan amount of its county are considered jumbo loans. Nonconforming loans and jumbo loans can not be securitized by Fannie Mae and Freddy Mac and don’t offer the same advantageous interest rates, low down payments, and favorable terms to borrowers.

Borrowers applying for jumbo loans are subject to higher scrutiny of their credit score and credit history. Jumbo loan borrowers normally must shop around more for the lender that will offer them the terms they need. That’s because the demand for jumbo loans is lower, and there are fewer lenders that offer them. That said, there has been a surge in demand for jumbo loans in recent years.

You should keep in mind that the interest rate on jumbo loans is normally higher, sometimes hitting the 4-5% APR range or greater, and the down payments are also higher. Moreover, certain tax deductions and incentives are less available to jumbo loan borrowers which is another factor to consider.

In conclusion, understanding conforming loans in 202w and their unique benefits can save you many thousands of dollars over time, so it’s worth considering what the conforming loan limits are in your county. For the majority of states across the country, you can expect a conforming loan limit of $625,000 in 2022, up from $548,250 in 2021, and for specific high-cost counties, that limit will be larger.

Interested in getting a great deal on your mortgage? Reach out to an Astar loan officer! We know the in’s-and-outs of buying a home. Our loan officers will hold your hand through the process of securing a loan that is right for you. Email or call 888-ASTAR-11 (888-278-2711) to start the loan application process today!

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