Conforming Loan Limits

Today's Conforming Loan Limit is $417,000, But May Be Higher In Your Area

A conforming loan is a mortgage or deed of trust that fits the purchase guidelines set by the regulator and conservator of Fannie Mae and Freddie Mac — the Federal Housing Finance Agency (FHFA). A conforming loan is much easier for the mortgage originator — the bank, broker, or credit union that lent you the money — to sell than a non-conforming loan. Non-conforming loans are called jumbo loans or jumbo mortgages. Because the lending standards for conforming loans are easier for conforming loans than jumbos, it is important for home buyers and homeowners seeking a refinance to know the rules for conforming loans.

The conforming limit for a one-unit residence in 2012 is $417,000 for most of the US. Exceptions exist for specific high-cost areas, where the limit in 2012 is up to $625,500. Also, the basic and high-cost limits are higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The FHFA publishes lists of the high-cost areas on its Conforming Loan Limit page.

The conforming loan limit is the maximum loan amount Fannie or Freddie will buy, and is not the home’s purchase price. Therefore, it is possible for a homeowner to pay more than the usual down payment to push the loan amount down to the conforming loan level.

There is much more to a conforming loan than the amount. Conforming loans also have limits for a borrower’s debt-to-income ratio, credit score, and income history. Mortgage insurance is also a consideration and requirement in loans with small down payments.

Debt-To-Income Ratio Limits

A DTI ratio is a simple way of showing how much of your income is available to make a mortgage loan payment after all other continuing debt obligations are met.

Fannie Mae and Freddie Mac express their DTI requirements differently, but they both set a DTI maximum of 45%. There are two different ways to calculate DTI, and both are significant when applying for a loan:

• Tally current non-housing monthly debt (credit card payments, car and student loans, and so on) and divide it by total monthly pre-tax gross income. The ideal is 28%.
• Tally all monthly debt (including rent or current mortgage payments) and divide it by total monthly pre-tax gross income. The ideal is 38%.

The first number is an estimate of your monthly pre-tax gross income the lender allows for monthly housing expenses. This amount will includes principal and interest of the loan, property taxes, and homeowner’s insurance, which many lenders call PITI. Fannie Mae calls this PITIA, which it defines as principal, interest, taxes, insurance, and association dues. Freddie Mac does not like to see the first number, the monthly debt payment-to-income ratio, to exceed 36%.

The second number refers to the maximum percentage of your monthly pre-tax gross income Fannie and Freddie allow for all monthly housing expenses plus all recurring debt. Underwriters of conforming loans look at the second DTI closely, and will not accept a total DTI in excess of 45%. Fannie likes to see one month of PITIA in reserves. This may be gifted.

If your second number, the total DTI, is higher than 45%, consider paying off credit cards or other loans before applying for a conforming loan.

Loan-To-Value (LTV)

Fannie Mae and Freddie Mac use a series of acronyms to express the loan-to-value (LTV) ratio of a property. TLTV (Freddie Mac) and CLTV (Fannie Mae) is the total LTV for first and second mortgages and deeds of trust. HTLTV (Freddie Mac) and HCLTV (Fannie Mae) is the balance of the first mortgage or deed of trust plus the maximum balance available for a home equity line of credit (HELOC). The table “Calculating LTVs” demonstrates simple examples of all LTVs. Note that Fannie Mae also uses the term “gross LTV” to when referring to CLTV and HCLTV.

For purchase loans and no-cash-out refinances, Freddie Mac requires a 5% down payment — in other words, a 95% LTV, TLTV, or HTLTV. For cash-out refinances, Freddie expects an 80% LTV.

Fannie Mae’s LTV requirements are slightly different. For a purchases, Fannie allows a maximum LTV of 97% for fixed-rate mortgages, and 90% LTVs for ARMs. In other words, you need a 3% down payment for fixed-rate mortgages and a 10% down payment for ARMs if your loan originator plans to sell the loan to Fannie Mae. See the table Fannie Mae Requirements for more LTV and FICO score detail.

Job or Income History

Fannie Mae and Freddie Mac require a minimum history of two years of employment income. Both will accept an applicant with income received for a shorter period of time as long as the borrower’s employment history demonstrates positive factors, such as consistent employment in the same field. Borrowers relying on overtime or bonus income must have a history of 12 months (Fannie) or 24 months (Freddie) to be considered stable. The same rules apply for second or seasonal jobs.

Both require a Request for Verification of Employment (Fannie Mae Form 1005 or Form 1005(S)), or your recent pay stub and IRS W-2 forms covering the most recent two-year period. Freddie Mac requires some sort of statement of evidence the borrower will have stable future employment for three years.

Self-employed people need two years of receipt income, and one year of federal tax returns showing the self-employed income. Part of the analysis the mortgage originator must make is the stability of the borrower’s income.

Minimum Credit Score

The minimum FICO score accepted by Fannie Mae and Freddie Mac depends on the LTV of the loan. Note that “FICO score” refers to the brand of credit score produced by Fair, Isaac & Co. Originators of conforming loans do not use VantageScore, PLUS score, or other credit scores to measure a borrower’s credit score. If you are pre-checking your credit score to see if you meet Fannie and Freddie’s requirements, be sure to buy an authentic FICO score. Neither like “thin files” — borrowers with limited credit history.

Freddie Mac requires a 620 FICO for LTV, TLTV, and HTLTV ratios of less than 75%. For LTV, TLTV, and HTLTV’s above 75%, the minimum credit score is 660 for buyers of primary residences.

Fannie Mae requires a 620 FICO for fixed-rate mortgages and LTV, CLTV, and HCLTV ratios of less than 75%. Fannie Mae requires a 680 FICO for fixed-rate mortgages and LTV, CLTV, and HCLTV ratios of greater than 75%. For ARMS, the minimum FICO scores are 640 and 680. For interest-only loans, the minimum is 720. Fannie Mae wants originators to obtain FICO scores from two or more consumer credit reporting agencies, and wants the originator to use the lower of two scores, or the middle of three.

FHA Loan Limits Are Different!

It is easy to confuse the conforming loan limits for Fannie Mae and Freddie Mac and the lending rules for FHA home loans. First a brief distinction between Fannie/Freddie and the FHA. As mentioned above, Fannie and Freddie buy conforming loans from mortgage originators, and all of the rules mentioned in this article until this point explain the qualifications a loan must have before either will buy the loan. By contrast, the FHA is not a buyer of loans. The FHA guarantees FHA-conforming loans should the borrower ever default.

The FHA allows 3.5% down payments. The amount available starts at $271,050, and the maximum loan available is $625,600 depending on the area in the contiguous US. The limits for Alaska and Hawaii are higher. See the FHA Mortgage Limits page to learn the FHA mortgage limits for your area.

The minimum FICO score for FHA loans is 580. Expect the lender to require a 10% down payment if your score is between 500 and 579. Borrowers with FICO scores less than 500 are not eligible for FHA-insured financing. As a practical matter, your FICO score should be 620 or higher because most lenders place overlays on loans they orginate that are higher than FHA’s minimums.

The FHA requires borrowers to buy mortgage insurance if the down payment is less than 20%. See the Bills.com article FHA Mortgage Insurance Premium Program at a Glance to learn more about the FHA’s insurance requirements.

A Word About Mortgage Insurance

Any home loan with a down payment of less than 20 percent will require mortgage insurance, which protects the lender against loss if a borrower defaults on a loan. Private Mortgage Insurance (PMI) does not protect the borrower in case of default, but allows the borrower to qualify for a loan they could not otherwise get because the loan investor has a promise from an insurance company the principal will not be lost. The insurance premium is paid up-front or financed as part of the mortgage.

PMI can be canceled when the homeowner builds up enough equity in the home — 78% of the original value of the house. See the Bills.com private mortgage insurance to learn more about PMI, and the rules for canceling PMI.