When securing a loan for a new home, commonly known as a mortgage, the amount you can borrow is constrained by certain factors. Your creditworthiness and the extent to which you can allocate funds monthly, as influenced by your debt-to-income ratio, play pivotal roles in determining this limit.
Lenders adhere to guidelines set by the Federal Housing Finance Agency (FHFA) to ensure conformity in their loans. Loans that align with these standards are termed conforming loans within the realm of conventional lending.
What is the Conforming Loan Limit?
Conforming Loan Limits are essentially the maximum loan amounts established by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie. They are determined annually and represent the maximum loan amounts they are willing to purchase or guarantee.
The FHFA establishes conforming loan limits applicable to Fannie Mae and Freddie Mac, the two government-sponsored enterprises under its regulation. These entities acquire mortgages meeting their specific criteria from lenders and subsequently bundle them into mortgage-backed securities for investors. This approach ensures that lenders maintain the necessary liquidity to sustain affordable mortgage loans to homebuyers.
Fannie Mae and Freddie Mac impose additional criteria on the loans they acquire, encompassing minimum credit scores, minimum down payments, and maximum debt-to-income ratios (DTI). However, when discussing conforming loan standards, the primary focus is typically on the specified loan amount.
2024 Conforming Loan Limits
The baseline conforming loan limit for 2024 is $766,550 – up from $726,200 in 2023. The limit is higher in areas where cost of living is higher, such as counties in the High Rockies. A full table covering the counties in Colorado we serve is below for reference:
Conforming Loan Limits in High-Cost Areas
Given the considerable variation in home prices across the states and counties, a uniform conforming loan limit for the entire country poses challenges. Recognizing this, the FHFA designates higher limits for areas deemed “high cost”, contingent on median home values compared to the baseline conforming loan limit.
The specific conforming loan limit hinges on the median home value in a given area, reaching up to 150% of the baseline conforming loan limit. The reason that these loan limits are important in an area like Summit County where the median home price in 2023 was $1.1 million, is because a conforming loan tends to have the best interest rate.To ascertain the current limit in Summit or Eagle County, refer to the FHFA’s interactive map.
How Loan Limits Operate
Conforming loan limits are intricately linked to housing prices, with the FHFA annually adjusting its baseline limit based on the House Price Index (HPI) report. This report monitors the average surge in home values from the preceding year.
These loan limits then determine whether your mortgage will likely be sold on the secondary market to an entity such as Fannie and Feddie, or whether the lender is going to need to keep the loan in house.
Consumers favor conforming loans due to their typically lower interest rates compared to other non-conforming loan types.
Factors to Contemplate Before Exceeding Conforming Loan Limits
If you need a home loan that exceeds the conforming loan limit for your , you’ll have to get a jumbo loan, which allows higher loan limits. However, these loans are typically harder to qualify for, requiring higher credit scores and larger down payments.
For those considering a home purchase beyond conforming loan limits, comprehending the affordability and implications of a non-conforming loan is important. Larger loans translate to higher monthly payments, a particularly significant consideration in high-cost areas where local inventory may surpass high-cost loan ceilings.
If the property you wish to buy exceeds the conforming loan limit for your region, increasing your down payment offers a strategy to enjoy the benefits of conforming loan without resorting to a jumbo loan.
Opting for a Jumbo Loan
Potential borrowers should weigh the financial implications of a jumbo loan. While conforming loans may allow down payments as low as 3% for single family primary residence, jumbo loan applicants typically need a minimum 20% down payment, a credit score in the 700s, and a DTI of 45% or lower. Someone looking to purchase a second single family home requires a minimum of 10% down. If looking for a 2nd home that is a condo unit, many lenders will want you to put 25% plus down on these properties.
In conclusion, understanding the conforming loan limits is important, but it’s also necessary to consider various other factors that can impact your interest rates. Elements such as the property type (condo or single-family home) and its intended use (primary residence or investment property) play a significant role. Additionally, individual home buyers may encounter variations in their interest rates based on factors like credit score, debt-to-income ratio, reserves, and more. Taking these elements into account ensures a comprehensive assessment of the financial responsibilities when home buying, even for second home owners in the high country.
Prospective homebuyers needing to finance are encouraged to have an educational session and begin the process of obtaining mortgage as soon as they start thinking about finding a mountain home. CLICK HERE for a list of our preferred lender partners.