What are conventional loan limits?
Most conventional mortgages come with caps on the possible loan amount. These are called “conventional loan limits” or sometimes “conforming loan limits.”
In most parts of the country, conventional loan limits top out at over $500,000. So most home buyers will be well under the limit.
However, if you want to buy where real estate is more expensive than average, your limit may be higher. Because these caps are tied to local home prices at a county level.
If you need to borrow more, you may be able to find a “jumbo loan” (an outsized one) from a lender that’s comfortable with the amount you need. Many will happily lend millions of dollars to the most creditworthy applicants.
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Conventional Loan Limits in 2021
In 2021, the baseline loan limit is $548,250. So you should be able to borrow at least that — providing your credit and personal financial situation is strong enough to justify such a loan.
That figure is for buying a single-family home in an area with average or lower-than-average home prices. If you’re looking to buy multi-family housing in such an area, the maximum loan limits are higher depending on the number of units:
- Two units: $548,250
- Three units: $548,250
- Four units: $548,250
But it’s not just the number of units that can increase these loan limits. If you’re buying in a county where home prices are expensive, you may be eligible for a higher limit.
High-cost area limits
Indeed, limits are automatically 50% higher for four designated high-cost areas. That’s currently $822,375:
- The US Virgin Islands
There are also higher loan limits (again, up to 50% above the minimum) in other areas of the US where homes are significantly more expensive than average. For example, the cap for the 10021 ZIP code in Manhattan’s Upper East Side in New York for 2021 is also $822,375.
Meanwhile, there are gradations between the highest and lowest caps. So, for example, the 02199 ZIP code in Boston, Massachusetts, had a median home sale price in 2019 of $3,669,000. And its conventional loan limit in 2021 is $724,500 — not quite the highest available, but significantly above the “base” loan limit for the rest of the country.
All those figures are for single-family homes. And if you’re buying in one of the most expensive areas, the limits are higher for properties with multi-family occupancy:
- Two units: $1,053,000
- Three units: $1,272,750
- Four units: $1,581,750
What are conventional loans?
A conventional loan is one that isn’t directly guaranteed or “backed” by the federal government. These are loans issued by private mortgage companies and approved by rules created by Fannie Mae or Freddie Mac.
Government-backed loans still have loan limits but they are generally lower than those for conventional loans.
The exception is VA loans, which no longer have a formal limit. However, VA borrowers still need to meet qualifying thresholds set by lenders. And those lenders must always be sure that their borrowers can comfortably afford the monthly payments on a new mortgage.
You can divide conventional loans into two types:
- Conforming loans. Those bought by Fannie or Freddie, plus ones that meet their requirements and so could be bought by them.
- Non-conforming loans. Those not backed by the government nor buyable by Fannie or Freddie. These are purely private-sector mortgages and may not have formal loan limits.
Given we’re talking loan limits here, the following is about conforming loans. And that includes most conventional ones.
How conventional loan limits work and how to find yours
Every November, the Federal Housing Finance Agency (FHFA) announces new loan limits for conventional loans for the following year. And each limit is usually higher than the last, in line with rising home prices.
So, in the early 1970s, the standard limit for single-family homes was $33,000. By 2019, it was $484,350. And now, in $2021, it’s 356,362.
But don’t assume that rising loan limits are inevitable. When the FHFA announced 2020’s caps, 43 counties had ones that remained unchanged.
How to find your loan limit
The FHFA sets limits according to a formula laid down in the Housing and Economic Recovery Act of 2008 (HERA).
But you don’t need a calculator and home sales data to work out the limit in the county where you want to buy. Just type the ZIP code into this lookup tool from The Mortgage Reports.
Why are there conventional loan limits?
Technically, Fannie and Freddie are government-sponsored enterprises (GSEs). Their role is to channel credit to parts of the population where access to that credit creates a public good — in this case, increased homeownership.
The degree of Fannie and Freddie’s independence from the government is debatable. Because they’re regulated by the FHFA, their autonomy is limited.
And, more importantly, the federal government is likely to be on the hook for any extended losses they make. Hence these loan limits. They put a brake on lending and so limit the taxpayer’s exposure to risk.
Are limits for conventional loans and FHA loans the same?
No, because conventional loan limits are generally higher than those for FHA mortgages.
The most you can borrow for a single-family home in somewhere defined by the FHA as a low-cost county is $0. But the upper limit in high-cost counties is $0.
We put a random ZIP code (87190) into The Mortgage Reports lookup tool. Turns out, that’s in Bernalillo County in New Mexico, which is the most populous county in that state. There, the standard conforming loan limit was $0. But the FHA equivalent was $0.Speak with a mortgage specialist today.
What is a jumbo loan?
Jumbo loans are private loans that are not subject to the same regulations as conforming loans, and they may help you bridge the gap between the price of your dream home and the loan limits for conventional loans.
Be aware that getting approved for one of these can be more difficult than when you apply for other types of mortgages. And you may pay more for your borrowing.
Because jumbo loans are private, they’re relatively unregulated — compared to conforming loans or loans backed by a government agency.
And that can be both a good and bad thing. On the one hand, you need to be sure that you understand — perhaps with professional help — the terms of your loan agreement and are happy with them. On the other, you can negotiate more freely with the lender to tailor a deal that suits you.
Characteristics of a jumbo loan
Don’t see jumbo loans as a workaround for mortgage issues. Compared with conforming or government-backed loans, they often (but not always) come with:
- Higher mortgage rates. You might want to consider an adjustable-rate mortgage (ARM) to keep your interest rate affordable.
- Stricter underwriting standards. You’ll likely need an impressive credit score: often 700 minimum or 740 for bigger loans. And you shouldn’t have too many existing financial obligations eating up a high proportion of your monthly pre-tax income (this is your debt-to-income ratio, or DTI).
- Higher down payments. Many lenders demand at least 20% down for jumbo loans.
Because you usually negotiate your deal individually, you may be able to create some wiggle room for these. For example, if you’re putting down 50% of the home’s market value, you might get some leeway on your credit score or DTI.
Avoid jumbo loans with a piggyback loan
Some find it better to avoid jumbo loans by having two smaller ones: a conforming main mortgage and a “piggyback loan.” That’s a second mortgage that bridges the gap between the conventional loan limits and your purchase price.
For example, let’s say you wanted to buy a $750,000 home where the local loan limit was $550,000. You have $100,000 for a down payment. If you got a $650,000 loan, you would be over the conforming limit for the area, and you’d need a harder-to-get jumbo loan. Fortunately, that’s not your only option.
You could structure it as follows:
- Primary loan of $550,000
- Second mortgage of $100,000 (closes simultaneously with the primary loan)
- Down payment of $100,000
You potentially qualify much more easily for the primary loan since it’s a conforming loan, not a jumbo.
This doesn’t work for everyone. But it’s an idea worth exploring. All you can do is run the numbers. A mortgage calculator is a good place to start.
How to get a jumbo loan
Many lenders have suspended their jumbo loan program during the COVID-19 pandemic.
Mortgage companies put more on the line with these loans than with other sorts and many lenders are more risk-averse during uncertain times.
But don’t let that put you off. If you’re a reasonably strong borrower, you still stand a good chance of getting your application approved. You just have to search farther afield to find the lenders still offering jumbo loans.
While you’re shopping around for your jumbo loan, be aware that the variations between different lender mortgage rates can be wider for jumbo loans than for other types of mortgages. So be sure to explore the market widely to find your best deal.Click here for today's mortgage rates.