Understanding Conventional Loan Limits: Conforming vs. Non-Conforming
Conventional loan limits are the maximum amount a person can get when applying for a private mortgage. These may vary depending on various factors, including the type of loan and location.
Before getting a mortgage, it’s important to understand loan limits. Generally, these refer to the maximum amount an applicant can borrow. Limits may vary depending on the type of loan.
The Federal Housing Finance Agency (FHFA) publishes conforming loan limits annually. These are applied to any conventional loan that’s delivered to Fannie Mae. The limits are categorized into baseline and high-cost areas. To conform to the FHFA, lenders have to ensure that they only lend up to certain limits. That’s why they’re called conforming loans.
On the other hand, non-conforming loans are typically less standardized. That means their features may vary depending on the lender.
Aside from loan limits, other factors affect the maximum amount an individual can borrow. One of these is a borrower’s financial circumstances. For instance, lenders evaluate creditworthiness to decide if the loan amount is suitable for the borrower.
Understanding conventional loan limits for 2022 and the difference between conforming vs. non-conforming loans can help you determine which financing option is best for your needs and circumstances.
The Federal Housing Finance Agency (FHFA) is in charge of setting conforming loan limits annually. These are the limits used for all conventional loans delivered to Fannie Mae.
Loan limits vary per location and unit size. For single units in contiguous states and D.C., the loan limits are $647,200 for baseline areas and $970,800 for high-cost areas. Meanwhile, the baseline loan limit for Alaska and Hawaii is $970,800. There are no loan limits for high-cost areas in the two states.
Non-conforming loans can be an alternative for borrowers looking for higher loan limits. These loans don’t conform to loan limits set by the FHFA. That said, there may be more stringent requirements depending on the lender.
How Do Conventional Loan Limits Work?
Conventional loans are private mortgages, popular with first-time home buyers looking for financing options as these loans tend to have flexible terms.
There are two types of conventional loans. Conforming loans abide by the rules set by Fannie Mae and/or Freddie Mac. The FHFA determines the loan limits. These loans tend to require lower down payments and have lower interest rates.
On the other hand, non-conforming loans do not follow the Fannie Mae or Freddie Mac rules. They also don’t adhere to the FHFA loan limits. Thus, borrowers can access higher loan amounts. However, they tend to have higher down payments and interest rates.
Conforming Vs. Non-Conforming Loans
- Limits set by FHFA
- Loan limits may change annually
- It may be easier to qualify
- Tend to have lower down payments
- Tend to have lower interest rates
- Limits set by the lender
- Loan limits are based on the lender’s rules
- May have more stringent requirements
- Tend to have higher down payments
- Tend to have higher interest rates
Conforming Loan Limits for 2022
FHFA announces conforming loan limits yearly. The 2022 conforming loan limits showed significant increases from the listed limits in 2021.
There are two categories of conforming loan limits. These are the baseline and high-cost area limits.
For most U.S. states, the baseline loan limit for a one-unit property is $647,200. In comparison, that’s $98,950 more than the listed limit for a similar type of property in 2021.
In high-cost areas, the conforming loan limits for 2022 have also increased. For a single-unit property, the current high-cost area limit is $970,800. That’s $148,425 higher than the 2021 limit of $822,375.
The increase in conforming loan limits is attributed to the rising home values.
Conforming Loan Limits by Unit
- PROPERTY UNITBASELINE LOAN LIMITS (the Contiguous States, Washington, D.C. and Puerto Rico)BASELINE LOAN LIMITS (Alaska, Guam, Hawaii and the U.S. Virgin Islands)HIGH-COST AREAS (the Contiguous States, Washington, D.C. and Puerto Rico)HIGH-COST AREAS (Alaska, Guam, Hawaii and the U.S. Virgin Islands)
Baseline Loan Limits
Under the Housing and Economic Recovery Act (HERA), annual adjustments must be made to conforming loan limits to reflect changes in average home prices in the country. The increase should be based on the housing price index on the most recent 12-month period ending before the agency determines the annual adjustment.
Baseline loan limits apply to most states. Exceptions are Alaska and Hawaii. That said, counties designate loan limits. In most cases, the baseline loan limit applies to all counties in a state. However, economic differences may cause slight variations in some states.
Baseline conforming loan limits are determined for single- to four-unit homes. The 2022 conforming loan limits for the national baseline are:
- One-Unit: $647,200
- Two-Unit: $828,700
- Three-Unit: $1,001,650
- Four-Unit: $1,244,850
These apply to all states in the U.S. except for Alaska and Hawaii.
Loan Limits in High-Cost Areas
The FHFA releases different loan limits for those deemed as high-cost areas. The HERA defines a high-cost area as one where 115% of the local median home value exceeds the baseline loan limit.
Following the increase in median home values in high-cost areas last year, conforming loan limits have increased for 2022. The current limit for single units in high-cost areas is $970,800, or 150% higher than the baseline limit.
Loan limits determine the maximum amount available to interested borrowers. Thus, they may also influence a buyer’s decision on where to purchase a property.
For instance, some counties in Colorado are considered high-cost areas. That means loan limits may vary depending on the county in which a property is located.
If a home buyer wants to buy a $750,000 one-unit property in Colorado, they may have difficulty getting a home in San Juan County since the loan limit is only $647,200. But it may be possible to get a regular conforming loan in Summit County, which has a loan limit of $822,375.
The FHFA provides a list of loan limits per county.
Conforming loan limits increased across the country in 2022, with only 16 counties not recording an increase. Limits remained unchanged in four counties. Twelve counties previously deemed high-cost now fall under baseline loan limits.
Conforming loan limits for high-cost areas tend to be higher than the baseline limits due to the higher cost of homes. In 2022, the high-cost area limits are:
- One-Unit: $970,800
- Two-Unit: $1,243,050
- Three-Unit: $1,502,475
- Four-Unit: $1,867,275
These loan limits apply to 17 states with high-cost areas, plus Washington, D.C.
Non-Conforming Loan Limits
Non-conforming loans refer to loans that don’t conform to the limits set by the FHFA. They also don’t meet the standards of Fannie Mae and Freddie Mac.
Private lenders offer these loans. Thus, they are less standardized. Their features also vary depending on the lender. That means there are no standard non-conforming loan limits.
There are various reasons a home buyer would decide to take a non-conforming loan. The cost of the property is one of them.
Let us say you’re interested in purchasing a home in a low-cost location. However, the property's price exceeds the baseline loan amount set by the FHFA. A non-conforming loan is an alternative option to get a higher loan to finance your chosen property.
Below are examples of non-conforming loans.
Home buyers looking for a financing option for a high-value property may have heard of jumbo loans. Also known as jumbo mortgages, this option offers loan amounts higher than the FHFA limits. Large banks and online lenders typically offer these.
In comparison to conforming loans, jumbo loans come with higher payment requirements. Interest rates tend to be higher. They may also have more stringent rules.
Each lender determines the qualification requirements for jumbo loans. That said, you may want to take note of some common qualifying factors.
For instance, jumbo loans typically require a down payment. Depending on the lender, this can be as high as 20%.
The credit score is also important as lenders use it to determine a borrower’s creditworthiness. Most lenders require at least a 700 FICO score. While some may accept borrowers with lower credit scores, the interest rate is often higher.
Another important detail is your debt-to-income (DTI) ratio. This is the amount of money you owe compared to your income. A 43% or lower ratio is the ideal DTI ratio to qualify for jumbo loans.
Jumbo loans also consider the cash reserves of borrowers. That’s because reserves show that the borrower is less likely to default. Depending on the lender, there may be reserve requirements.
Jumbo loan limits vary for each lender. Generally, they are higher than the FHFA limits. This allows borrowers to finance more expensive homes.
Other Non-Conforming Loans
There may be other loans considered non-conforming because of how the lender verifies the borrower’s income. For instance, many lenders only consider the average bank deposits of the borrower over several years instead of requiring tax returns and pay stubs.
Other loans are deemed non-conforming because they cover other property types, such as condotels and farms.
Another type of non-conforming loan is one that offers to finance borrowers with low credit scores.
Generally, non-conforming loans don’t follow specific standards. Interest rates, terms, features, pricing and eligibility requirements are determined by each lender.
Frequently Asked Questions About Conventional Loan Limits
Finding the right loan can be a bit overwhelming. MoneyGeek answers some of the most commonly asked questions about conventional loan limits to help you make a well-informed decision.