What You Need To Know About Conforming Loan Limits Before Buying A House

If you've looked into securing a mortgage recently, particularly one for a home located in a high-cost real estate market, you may have come across the term conforming loan limits. What does that mean? Isn't the mortgage process already confusing enough?

Conforming loan limits sound more complicated than they actually are. Basically, according to Nerd Wallet, there are two types of mortgage loans in the U.S.: conforming loans and nonconforming loans. A conforming loan adheres to standards set by the federal government through its two major home buying agencies, the Federal National Mortgage Association (often referred to as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These two entities give banks, credit unions, and mortgage companies a sense of security in providing mortgages because even if a buyer defaults on their loan payments, the U.S. government will guarantee the loan and ensure the lender is not left out to dry.

Nonconforming loans are not guaranteed by Fannie Mae or Freddie Mac because they do not adhere to the agencies' requirements, typically because they are much larger than the average home loan and are intended for purchasing more expensive properties. There is a certain dollar amount at which conforming loans are capped known as the conforming loan limit. If the loan exceeds that dollar amount, it becomes a nonconforming loan, often referred to as a jumbo loan.

Conforming loan limits are technically set at the local level, as Nerd Wallet explains. Every county in the U.S. has housing supervisors who set the loan caps for homebuyers within their county. However, the Federal Housing Finance Agency (FHFA) sets a federal standard that is applicable to most counties, with some specific recommendations for counties located in more expensive housing markets. County housing supervisors typically adhere to FHFA standards when setting their own conforming loan limits.

Securing a mortgage that's under the conforming loan limit can be a big deal for homeowners. Mortgages for an amount higher than the limit involve jumping through many more hoops. To take out a loan below the limit, a borrower usually needs to have at least a fair or average credit score of 620, according to Zillow. For nonconforming loans, that base score will need to be 700 or higher. Another potential issue is the down payment. It used to be standard for a homebuyer to pay 20% of a home's total cost as a down payment, an amount that, in today's housing market, is often out of reach. These days, lenders typically accept a lower down payment, sometimes going down to 3%. But for nonconforming loans, strict 20% down payment standards remain, and some lenders will require payments that are even higher. Lenders may also require proof of substantial cash reserves when issuing a nonconforming loan.

Prior to this year, the national standard for a conforming loan limit was set by the FHFA at $647,200. If you required a larger loan, you'd be jumping through the aforementioned additional hoops. But, for 2023, that number has increased by a whopping $79,000 to a total of $726,200, as reported by Zillow. The FHFA also sets a loan standard for counties located in a high-cost market (103 counties, mainly concentrated in the East Coast, West Coast, or Mountain West areas, are currently designated as high-cost markets, meaning they are some of the most desirable and expensive places to live in the country). The recommended standard for conforming loan limits in these counties has increased to $1,089,300, marking the first time in history that a buyer can be granted a conforming loan for over a million dollars.

With housing costs continuing to rise, especially because of continued hike in interest rates, raising the conforming loan limits means more buyers will have access to properties they may not have been able to secure in the past. By opening up more properties to homebuyers with lower credit scores and cash reserves, the U.S. government is aiming to make housing and homeownership more accessible.