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Conforming Loan Limits, Conventional Loans

Conforming Loan Limits

A conforming loan is one that meets the standards of loan guidelines as established by government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae, meaning Freddie and Fannie can buy loans up to predetermined amount, with that amount adjusted annually. Presently, the conforming loan limit for a single-family home is $417,000, although as part of the Economic Stimulus Act of 2008, the loan limit in certain high-cost areas of the U.S. have a new cap of up to $729,750, depending on location. These loans are referred to as "conforming jumbo" loans. The cap for these loans is calculated to be 125 percent of the area median home price and is not to exceed $729,750, except in Alaska, Hawaii, Guam and the U.S. Virgin Islands, where the cap is 50 percent higher than the limits for the rest of the country.

By the way, the new cap is temporary - until Dec. 31, 2008, when the loan limits are supposed to revert back to $417,000.

Confused yet?

Boiled down to real language, prior to the Stimulus Act, conforming loan limits were $417,000 and rates were attainable. However, if you needed a loan over $417,000 - called "non-conforming jumbo loans" - you probably paid a percentage point or two above what a conforming loan cost. For loans that big, it was difficult for borrowers to qualify. For example, suppose "John" needed a mortgage loan for $350,000 - he could get a rate around 6.5%. But if John wanted to buy a bigger house and needed a mortgage loan of $600,000, his rate could be as much as 7.5-8.0%, only because the loan amount exceeds $417,000. See the difference?

With inequity in rates, the mortgage crisis and a stalled real estate market, the government has stepped in to try to kick-start the high-end market by lifting the lid on the conforming cap. The hope is that for borrowers who live in these areas, the rates and availability on higher-end loans that were once hard to get are now more accessible. For example, borrowers who are in high-cost Jumbo ARMs can refinance into a lower-rate 30-year fixed with more affordable payments. Also, sellers who live in higher-priced areas will have a better chance of selling their home with more loan options available for potential buyers.

Where is the money?

Freddie Mac and Fannie Mae have agreed to buy jumbo mortgages in 224 high-cost markets where median home prices exceed the original conforming loan limit of $417,000. The loans will be purchased from Wells Fargo Home Mortgage, Chase, CitiMortgage, WaMu, and from all lenders that sell to GSEs and the Federal Housing Administration (FHA). Freddie and Fannie will then bundle thousands of these loans together and resell the debt to investors. Investors are comfortable buying the debt packaged and sold by Fannie and Freddie because these two GSEs only buy loans that will meet their standards for creditworthiness.

Qualified borrowers can use Freddie and Fannie conforming jumbos to finance up to 90% of a property's value and can purchase or guarantee jumbo mortgages that originated between July 1, 2007, and Dec. 31, 2008.

These increases will also apply to Federal Housing Administration loan guarantee programs. View the FHA mortgage limits for your area.