What are conforming loan limits, and why are they increasing?

December 10, 2021

Expert insights on how loan limits affect the housing market and why they changed for 2022.

 

If you’ve been home shopping this winter or work in real estate, you’ve probably heard more buzz again this year about the recent adjustment to conforming loan limits. With this year’s larger-than-normal increase, U.S. Bank financial industry and regulatory affairs expert Robert Schell shares his insights on why this occurred. Read on to learn what conforming loan limits are and how they impact the housing market.

 

Conventional versus jumbo mortgages

Conforming loan limits, at their core, are used to separate conventional loans from jumbo loans. Fannie Mae and Freddie Mac, sometimes referred to as government sponsored enterprises (GSEs), set requirements like down payments, minimum credit scores, and documentation for mortgages they purchase. Additionally, the Federal Housing Finance Agency (FHFA), which regulates the GSEs, sets guidelines on maximum loan sizes (i.e., conforming loan limits) that qualify for purchase by Fannie Mae and Freddie Mac, helping them manage their risk when purchasing conventional mortgages from lenders.

Jumbo loans are mortgages that exceed these conforming loan limits. Unlike conventional mortgages, jumbo loans cannot be purchased by Fannie Mae and Freddie Mac. Instead, they generally must be maintained by the lender for the entire life of the loan. This puts increased risk on lenders and drives up interest rates for homebuyers.

 

Supporting homebuyers through the secondary mortgage market

Conventional mortgages are designed to benefit the average homebuyer, ensuring that the housing market is affordable for most people. Fannie Mae and Freddie Mac help make this possible by purchasing conventional mortgages from lenders. When a buyer takes out a home loan, lenders can sell the mortgage to Fannie Mae and Freddie Mac, who bundle numerous mortgages together to create securities. These securities are later sold on the secondary market.

Robert explains the process: “The GSEs take individual mortgage loans, buy them from lenders, and then pool them – or package them together – into securities. There might be one security that has a thousand mortgages from all different parts of the country. Those thousand mortgages are sliced and diced into different tranches of risk that investors might want to buy.”

When Fannie Mae and Freddie Mac buy a mortgage from a lender, they assume the associated risk and spread it between investors. If a homeowner defaults on their mortgage, the impact for lenders is significantly minimized because they've already sold off the mortgage to Fannie Mae and Freddie Mac. In turn, lenders are more likely to reduce interest rates.

Investors purchasing mortgage-backed securities benefit from the pooling together and repackaging of mortgages while guaranteed against the risk of homeowner default by Fannie Mae and Freddie Mac. Meanwhile, the GSEs benefit from the scale and diversification that makes the impact of a single mortgage default like a drop in the bucket compared to the more than $6 trillion of combined mortgage portfolios between both companies.

“By pooling risk and selling securities to investors, GSEs help make mortgages more accessible and affordable for borrowers,” Robert explains. “And they pull in additional investment money into the mortgage market, which helps make that happen.”

 

Loan limits increase for 2022

Every November, the FHFA adjusts the conforming loan limits to reflect changes in the housing market. This helps ensure the average homebuyer can still get a conventional mortgage, even as housing costs rise. The FHFA recently announced that the baseline conforming loan limit for 2022 will increase 18% to $647,200, with the limits up to 50% higher in designated high-cost areas. That’s more than double the percentage increase of last year’s record-setting 7.4% rise.

“When the FHFA does this, they’re just following a formula, they’re not making any judgment calls,” says Robert. “They’re looking at what home price data is saying and how it’s increasing from last year to this year. 18% is consistent with what the data says.”

But what made housing prices rise so sharply in 2021? It comes down to supply and demand. The housing market has a limited supply of houses, and, at least anecdotally, geographic mobility sharply increased in the last two years, causing both more buying and selling around the country. Global supply chain issues delaying new home construction and record-low mortgage rates that increase affordability and competition for houses have only compounded that impact. “We’re seeing the same effects, it’s just the second year of them and they’re accelerated,” Robert says.

FHFA Acting Director Sandra L. Thompson released a statement addressing the issue on the same day the 2022 conforming loan limits were announced:

“…Compared to previous years, the 2022 Conforming Loan Limits represent a significant increase due to the historic house price appreciation over the last year. While 95% of U.S. countie​s will be subject to the new baseline limit of $647,200, approximately 100 counties will have conforming loan limits approaching $1 million. FHFA is actively evaluating the relationship between house price growth and conforming loan limits, particularly as they relate to creating affordable and sustainable homeownership opportunities across all communities.”

 

FHA loan limits

As another key player in the housing market, the Federal Housing Administration (FHA) is required by statute to follow the example of the FHFA when setting loan limits for low-income and first-time homebuyers. Not surprisingly, they announced similar adjustments to their maximum loan limits this November.

 

Looking forward

According to Robert, the increase in loan limits itself isn’t alarming, since the FHFA is essentially just following a formula based on home prices. “The loan limits themselves are just a natural consequence of what’s going on in the housing market,” he says. “But these are big numbers that are being put out, in terms of price appreciation. It can price people out of the market and that’s something we should pay attention to.”

 

Get more insights from a U.S. Bank mortgage loan officer on how COVID-19 changed the housing market.

Related content

Community activist achieves dream of homeownership

Tailor Ridge eBill case study

For today's homebuyers, time and money are everything

Here’s how to create a budget for yourself

How to use debt to build wealth

4 benefits of independent loan agents

Housing market trends and relocation impact

High-cost housing and down payment options in relocation

For today's relocating home buyers, time and money are everything

Crypto + Relo: Mobility industry impacts

Middle-market direct lending: Obstacles and opportunities

How I did it: Deciding whether to buy an RV

Take the stress out of buying your teen a car

Streamline operations with all-in-one small business financial support

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Checklist: financial recovery after a natural disaster

Personal loans first-timer's guide: 7 questions to ask

Dear Money Mentor: When should I refinance a mortgage?

How I did it: Bought a home without a 20 percent down payment

Starting your homebuying journey: Tips from a U.S. Bank Goals Coach

House Hacks: How buying an investment property worked as my first home

The lowdown on 6 myths about buying a home

Multiple accounts can make it easier to follow a monthly budget

Evaluating interest rate risk creating risk management strategy

First-time homebuyer’s guide to getting a mortgage

You can take these 18 budgeting tips straight to the bank

9 simple ways to save

Opening a business on a budget during COVID-19

How I did it: Learned to budget as a single mom

What’s a subordination agreement, and why does it matter?

What is an escrow account? Do I have one?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Money Moments: Tips for selling your home

Parent checklist: Preparing for college

Which is better: Combining bank accounts before marriage — or after?

What are conforming loan limits and why are they increasing

Don’t underestimate the importance of balancing your checking account

Do you and your fiancé have compatible financial goals?

Is it time to get a shared bank account with your partner?

Putting home ownership within reach for a diverse workforce

Should you get a home equity loan or a home equity line of credit?

Quiz: How prepared are you to buy a home?

How to establish your business credit score

What is a CLO?

Checklist: 10 questions to ask your home inspector

5 things to avoid that can devalue your home

When to consider switching banks for your business

7 steps: How couples and single parents can prepare for child care costs

Adulting 101: How to make a budget plan

Common unexpected expenses and three ways to pay for them

What you need to know about renting

How to save for a wedding

It's possible: 7 tips for breaking the spending cycle

Personal finance for teens can empower your child

Save time and money with automatic bill pay

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

How I did it: Built living spaces to support my family

Spring cleaning checklist for your home: 5 budget-boosting tasks

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

Checklist: 6 to-dos for after a move

Webinar: Uncover the cost: Building a home

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Money Moments: How to finance a home addition

How I did it: My house remodel

Are professional movers worth the cost?

Building a dream home that fits your life

10 questions to ask when hiring a contractor

How you can take advantage of low mortgage rates

Is it the right time to refinance your mortgage?

4 questions to ask before you buy an investment property

10 ways to increase your home’s curb appeal

What is a home equity line of credit (HELOC) and what can it be used for?

Webinar: Uncover the cost: Home renovation

Is a home equity line of credit (HELOC) right for you?

10 uses for a home equity loan

Preparing for homeownership: A guide for LGBTQ+ homebuyers

Beyond the mortgage: Other costs for homeowners

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Webinar: Mortgage basics: How much house can you afford?

Webinar: Mortgage basics: Buying or renting – What’s right for you?

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

8 steps to take before you buy a home

These small home improvement projects offer big returns on investment

What is refinancing a mortgage?

How do I prequalify for a mortgage?

6 questions to ask before buying a new home

Home equity: Small ways to improve the value of your home

Closing on a house checklist for buyers

How to prepare for a natural disaster

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

Practical money skills and financial tips for college students

How I did it: Paid off student loans

5 tips for seniors to stay a step ahead of schemers

Recognize. React. Report. Caregivers can help protect against financial exploitation

Is online banking safe?

Identity stolen? 5 steps to take immediately

Everything you need to know about consolidating debts

Know your debt-to-income ratio

Your quick guide to loans and obtaining credit

Test your loan savvy

Is a home equity loan for college the right choice for your student

How to apply for federal student aid through the FAFSA

Be careful when taking out student loans

Your financial aid guide: What are your options?

ABL mythbusters: The truth about asset-based lending

Collateral options for ABL: What’s eligible, what’s not?

Bringing economic opportunity to underserved communities one home at a time

Military homeownership: Your guide to resources, financing and more

Crypto + Homebuying: Impacts on the real estate market

Webinar: Buying a home in 2022: what to expect

How jumbo loans can help home buyers and your builder business

When small companies buy big: The potential of asset-based lending

How to maximise your infrastructure finance project

Questions to ask before buying a car

What you should know about buying a car

How to choose the best car loan for you

What you need to know before buying a new or used car

Can you take advantage of the dead equity in your home?

How I did it: Turned my side hustle into a full-time job

How to get started creating your business plan

How to fund your business without using 401(k) savings

Costs to consider when starting a business

How a small business is moving forward during COVID-19

Prioritizing payroll during the COVID-19 pandemic

5 tips to help you land a small business loan

Investing in capital expenditures: What to discuss with key partners

Can ABL options fuel your business — and keep it running?

Tech lifecycle refresh: A tale of two philosophies

At your service: Outsourcing loan agency work

Maximizing your infrastructure finance project with a full suite trustee and agent

An investor’s guide to marketplace lending

Should you buy a house that’s still under construction?

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.