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What Does The Conventional Loan Limit Mean?

By Stacy Williams

Conventional Loan Limits and their Purpose in Mortgage Markets.

This type of loan is one that meets the specifications of the GSE (Government Sponsored Enterprise) guidelines. Another term for these loans is “conforming” loan. In general these loans mean that the amount being borrowed by a person, falls within the desired range without exceeding the person’s ability to easily repay the loan. If a loan is issued that exceeds the GSE guidelines for reasonable lending it is known as a “jumbo” loan. The criteria is rather simple for identifying loan limits and are regulated by the OFHEO.

What Factors Are Used To Determine The Limit?

There are specific criteria that determine what individual conventional limits will be for each person or family. Factors that are considered include family size, income, amount requested and local financial markets. Factors such as income and the amount of debt a person has are used to calculate the conventional limit through ratios. The average yearly home price is also factored into the equation, with the October to October average being the limit at which, if the mortgage exceeds that value it is NOT a conventional loan.

It is important to note that the housing recovery act of 2008 changed how conforming loans would be determined. For high cost living areas the limit was raised so that more loans would be considered to meet conventional loan limits. This change in conventional loan limits was aimed at ensuring housing opportunities for low income and middle class families.

It is important to note that conventional loans and conforming loans are often interchangeable terms. In summation, if either term is used it refers to the loan being within a limit that the government regulations of mortgage industry feel is acceptable for the borrower to be able to repay. Each region in the U.S. has varying conventional loan limits based upon the local economy.

Related posts:

1. What Is A Conforming Mortgage Loan?
2. Can I Refinance A Jumbo Loan In This Market?
3. How Do Conventional Home Loans Compare To FHA Loans?
4. What Is A Non-Conforming Mortgage?
5. What Is The Best Rate To Refinance My Mortgage Loan?