In the United States, a conforming loan limit is the maximum dollar amount Fannie Mae and Freddie Mac, the largest mortgage buyers in the United States, will pay a lender for a mortgage. These limits apply to conforming mortgages, which are loans that meets the criteria Freddie Mac and Fannie Mae set. Conforming loan limits are not fixed values. Instead, they change according to the average cost of homes in a given year.
To understand conforming loan limits, a person must first learn about Freddie Mac and Fannie Mae. While these names may seem to describe two people, they are actually the names of federal corporations. Freddie Mac is the Federal Home Loan Mortgage Corporation and Fannie Mae is the Federal National Mortgage Association. Freddie Mac purchases conventional mortgages from insured financial institutions and mortgage bankers that have Department of Housing and Urban Development (HUD) approval. Fannie Mae purchases and sells not only conventional mortgages, but also Veterans Administration (VA) and Federal Housing Authority Administration (FHA) loans.
Both organizations help make it easier for people to obtain mortgages. Essentially, lenders are typically more willing to grant conforming loans because they can sell them to Freddie Mae or Fannie Mac and then have more money to make additional loans. As far as benefits for buyers are concerned, conforming loans are typically offered at lower rates and are usually easier to secure.
Freddie Mac and Fannie Mae set standards for conforming loans, including conforming loan limits and borrower criteria. To establish conforming loan limits, Freddie Mac and Fannie Mae consider the average price of homes in a given year and then set mortgage loan maximums. If a loan falls within these limits, it is called a conforming loan. Loans that do not fall within the current limits are called non-conforming loans.
When Freddie Mac and Fannie Mae set conforming loan limits, they set maximum dollar amounts for the loans they purchase from lenders. For example, in a given year, the conforming loan limit may be $417,000 US dollars (USD). There are exceptions to these maximums, however, and Fannie Mae and Freddie Mac set different conforming loan limits for mortgages offered in areas with high housing costs. In such areas, the conforming loan limits may be much higher. As such, a person who is reviewing the current limits will see separate figures for general and high-cost area limits.
While the term conforming loan limit is typically used in the United States, other countries may use it, or similar language, as well. In such a case, it basically means the limit set for government-supported mortgages. Such limits will differ from those set in the United States.