What are conforming credit limits?

In the United States, a conforming loan limit is the maximum dollar amount that Fannie Mae and Freddie Mac, the largest mortgage buyers in the United States, will pay a lender for a mortgage. These limits apply to conforming mortgages, which are loans that meet the criteria set by Freddie Mac and Fannie Mae. Conforming credit limits are not fixed values. Instead, they change according to the average cost of homes in a given year.

To understand conforming loan limits, a person must first learn about Freddie Mac and Fannie Mae. Although these names seem to describe two people, they are actually the names of federal contractors. Freddie Mac is the Federal Home Loan Mortgage Corporation and Fannie Mae is the Federal National Mortgage Association. Freddie Mac purchases conventional mortgages from insured financial institutions and mortgage lenders that have approval from the Department of Housing and Urban Development (HUD). Fannie Mae not only buys and sells conventional mortgages, but also Veterans Administration (VA) and Federal Housing Authority Administration (FHA) loans.

Both organizations help make it easier for people to obtain mortgages. In essence, lenders are typically more willing to make conforming loans because they can sell them to Freddie Mae or Fannie Mac and then have more money to make additional loans. In terms of benefits to the buyer, conforming loans are generally offered at lower interest rates and are usually easier to secure.

Freddie Mac and Fannie Mae set standards for conforming loans, including conforming loan limits and borrower criteria. To set conforming loan limits, Freddie Mac and Fannie Mae consider the average price of homes in a given year and then set maximum mortgage loan amounts. If a loan falls within these limits, it is called a conforming loan. Loans that are not within current limits are called nonconforming loans.

When Freddie Mac and Fannie Mae establish conforming loan limits, they set maximum dollar amounts for the loans they purchase from lenders. For example, in a given year, the conforming loan limit may be $417,000 (USD). However, there are exceptions to these limits, and Fannie Mae and Freddie Mac set different credit limits for mortgages offered in areas with high housing costs. In such areas, conforming loan limits can be much higher. Therefore, a person reviewing the current limits will see separate numbers for general and high-cost area limits.

While the term conforming loan limit is typically used in the United States, other countries or similar language may use it as well. In such a case, this basically means the limit on government-backed mortgage loans. These limits will differ from those in the United States.