What is a conventional loan?
A conventional loan is a type of mortgage that is not backed by any government-sponsored insurance. This contrasts with other popular mortgage products like an FHA or VA loan, which both come with insurance a lender can fall back on in case of default. Instead, conventional loans follow underwriting guidelines set by Fannie Mae and Freddie Mac. They typically have higher credit and down payment requirements, but also offer lower interest rates and more loan term options.
What do I need to do to get a conventional loan?
To get a conventional mortgage, you will typically need to meet the following minimum requirements:
- Have a stable income that allows you to make monthly mortgage payments on time.
- Provide proof of your employment and income, such as pay stubs and tax returns. Most underwriters will also contact your employer to confirm.
- Have a total debt-to-income ratio of 45% or lower.
- Have a good credit score, 620 or above.
- Have a down payment of at least 5% of the purchase price of the property. There are some programs that will allow a 3% down payment, but they come with their own requirements, like a 680 minimum credit score.
What is the conforming conventional loan limit?
The Federal Housing Finance Agency (FHFA) sets minimum loan amount limits for Fannie Mae and Freddie Mac “conforming” conventional loans. Loan amounts that exceed the conforming loan limit are called “jumbo” loans. Limits will vary by location and property type. In most places, the lending limit for a single-family home in 2023 is $726,200. Properties in high-cost areas may have a limit as high as $1,089,300.
Did it change?
The FHFA reviews loan limits annually. The new baseline loan limit for a single-family home in 2023 will be $726,200, up from $647,200 in 2022. This means that anyone looking for a loan of $726,200 or lower may apply for a conventional fixed- or adjustable-rate mortgage. Anything above that limit is a jumbo loan.
Who sets the loan limit?
The Federal Housing Finance Agency (FHFA) sets conventional the conforming loan limits. Limits represent the maximum amount someone may borrow using a conforming conventional loan. Conforming conventional loans are those mortgages considered purchasable by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Individual limits vary by state and county, based on median home prices in that area. One thing to note is that the FHFA provides guidelines and may not have the final say. Fannie Mae and Freddie Mac may decide to approve a loan over the limit. We should note, however, that this is not common. Generally, the lender will honor the limit in an area and anything over will be a jumbo loan.
How often does the FHFA reassess the limit?
The FHFA bases loan limits on home prices and other economic indicators, both local and national. Accordingly, they perform an annual audit to determine limits for the upcoming year. But that does not mean lending limits cannot change more frequently. Depending on how things look, limits may change within the year.
Does the loan limit change every year?
The loan limit is subject to change every year, but that doesn’t mean it will. Updates to loan limits reflect changes in the housing market and overall economy. If there is no significant change in the market, it’s possible that limits do not change. Regardless of whether the limits change, the FHFA will still announce loan limits for the upcoming year.
Are there different limits for different programs?
The Federal Housing Administration (FHA) has loan limits that vary by county. The FHA takes a similar approach to the FHFA, setting a nationwide floor limit, as well as a ceiling limit for high-cost areas. FHA limits are typically lower than those of conventional loans. The Department of Veterans Affairs (VA) also has its own loan limits. VA limits fall in the middle, being a little higher than FHA but lower than conventional. Finally, The US Department of Agriculture (USDA) has its own loan limits for rural properties. These limits are usually lower than those of other loan programs.
Does the FHFA set the limit for other loan programs?
No, the Federal Housing Finance Agency (FHFA) does not set loan limits for other loan programs. Each loan program has its own limits, set by its own agency or lender. Where the FHFA is unique is that it sets a minimum jumbo loan amount. This is because jumbo loans are still conventional; they just are non-conforming.
What if I need a loan above the limit?
There are loan products that are above the conventional mortgage loan limits set by the Federal Housing Finance Agency (FHFA). These are non-conforming, or jumbo loans. Jumbo loans typically have higher interest rates and stricter eligibility requirements than conforming loans. This includes a higher credit score and a more significant down payment. Fannie Mae and Freddie Mac do not consider jumbo loans for purchase.