What are Mortgage Loan Limits?
What is a Loan Limit?
A mortgage loan limit is a monetary cap; the maximum amount loaned to consumers from lenders to purchase or refinance a home.
Loan limits, along with several other factors like borrower credit and the type of property financed, are specified in the guidelines for every mortgage program. For example, FHA loans and VA loans have different loan limits.
- Conforming loan limits restrict the size of mortgages made by lenders and delivered to Government Sponsored Entities (GSEs) Fannie Mae or Freddie Mac.
- FHA loan limits set the maximum loan amount for mortgages insured by the Federal Housing Administration.
- VA loan limits restrict the size of mortgages backed by the Veteran’s Administration guaranty.
How are conforming loan limits are determined?
Conforming loan limits not only play a role in capping loan amounts for conventional loan programs but for FHA and VA loan programs as well. Several loan programs pivot off of the national conforming loan limits, so it’s a good idea to understand how they are determined (and who is responsible for them).
Every year, the Federal Housing Finance Agency (FHFA) updates and publishes conforming loan limits for every county in the United States. FHFA is a part of HUD and regulates Fannie Mae and Freddie Mac, two government sponsored entities (GSEs) that buy up most of the mortgages made by private lenders to consumers. Any conventional mortgage, made by a lender and meant to be delivered to a GSE, must meet FHFA’s published requirements.
The FHFA bases conforming loan limits on the House Price Index (HPI), an aggregate of prices for repeat home purchases and refinances dating back to 1975. The HPI data shows this history of prices and where the changes occur.
Conforming loan limits used to be uniform, regardless of location. In response to a financial crisis in 2008, FHFA revised the limits for high-cost counties in the United States. Loan amounts in high-cost areas got additional headroom – higher limits – before they’d be considered a non-conforming loan.
In general, loan limits are higher in-and-around big cities. For example, conforming loan limits in Seattle are lower ($592,250 for King County, Washington) than Los Angeles ($636,150 for Los Angeles County, California).
A lot of this mortgage terminology can be confusing. The decision tree/chart below will help keep things straight. Simply put, there are two main buckets of home loans, conventional and government-insured. Conventional loans below the conforming loan limit are conforming and loans above it are non-conforming (also known as jumbo loans).
Conventional Loan Limits
Conforming Loan Limits
For one-unit properties, the national conforming loan limits are:
- $424,100 most counties in the United States
- $636,150 in high-cost areas (except Hawaii)
Jumbo Loan Limits (Non-Conforming)
Jumbo loans are “non-conforming” mortgages where the original loan amount exceeds conforming loan limits. Jumbo loans don’t technically have loan limits because they are not sold to Fannie Mae or Freddie Mac. Therefore, they are not bound to GSE guidelines.
More often than not, when people use the term “jumbo loan limits” they’re referring to the national conforming loan limits, not the maximum loan amount.
Government Insured Loans
The United States Department of Housing and Urban Development (HUD) is the parent organization of the Federal Housing Administration (FHA). HUD insures loans made by private lenders to consumers via FHA mortgage insurance. The department also sets property and borrower eligibility requirements for the FHA program.
The United States Department of Veterans Affairs (VA) backs loans made by private lenders via the veteran’s basic entitlement indicated on the Certificate of Eligibility.
FHA Loan Limits
The Federal Housing Agency bases FHA mortgage program loan limits on the national conforming loan limit. FHA also makes an adjustment based on the county in which the property resides. There are two tiers.
The first tier is called a “floor,” and it applies to low-cost areas. The floor is 65% of the national conforming loan limit of $424,100. Thus, the floor works out to $275,665 (65% x $417K).
How do you know if you’re in a low-cost area? You’re in a low-cost area if median home prices in your county are 15% less than the floor, or $234,315 ($271,050 – 15%).
For all other areas, high-cost loan limits apply. FHA loan limits in high-cost areas are 115% of median home prices in your county, but no more than $636,150.
For one-unit properties, the FHA loan limits are:
- $275,665 floor in low-cost areas,
- 115% of median home prices in the county, or a maximum of
- $636,150 ceiling in high-cost areas.
VA Loan Limits
The VA doesn’t set loan limits. Rather, they cap the VA loan guaranty (the amount they’d have to pay to make a private lender whole should a borrower default). The VA generally guarantees 25% of the local conforming loan limit or the loan amount, whichever is less. Given these VA guaranty restrictions, lenders do not often make loans that exceed conforming loan limits.
For one-unit properties, VA typically guarantees 25% of a loan amount up to:
- $636,150 in high-cost counties
As you can see, maximum loan amounts vary by mortgage program. Addition borrower and property attributes also cap the size of mortgage. Final loan limits are subject to:
- Property eligibility guidelines for manufactured homes, VA-approved condominiums and FHA-approved condominiums
- Borrower eligibility requirements like income, credit history and size of down payment
- Number of units in the building
- Borrower counseling requirements
- Regulation and fair lending laws