The loan limit for "conventional" or "conforming" financing will increase 9.3 percent from $275,000 to $300,700 for single-family homes as of January 1st, according to announcements made by both Fannie Mae and Freddie Mac.

The "conventional loan limit" can be seen as the largest amount available to finance an owner-occupied single-family house without paying a premium interest rate for "jumbo" financing. Yesterday, for example, Bankrate.com reported that conventional 30-year financing was available at 6.60 percent while a jumbo mortgage above the conventional loan limit had an interest rate of 7.01 percent.

The difference between 6.60 and 7.01 percent interest can be considerable: For a $300,000 mortgage at 6.60 percent over 30 years the monthly payment would be $1,915.98 for principal and interest. Cross the new conventional loan boundary, borrow $301,000 at 7.01 percent, and the monthly payment would rise to $2,004.58 -- a difference of $88.60 a month or $1,063.20 a year.

The bottom line: By raising the conventional loan limit, borrowers can qualify for bigger mortgages and avoid the jumbo loan penalty.

The conventional loan limit is not only important to borrowers, it's also significant to lenders.

A local lender can make a loan that meets the standards for a conventional mortgage and know that the loan can be re-sold to buyers such as Fannie Mae and Freddie Mac. This means a lender can make a conventional loan, easily sell it, get new capital from the sale, and then make more loans that generate interest and fees.

The new conventional loan limits look like this:

• $300,700 for mortgages on one-family properties (up from $275,000 in 2001).

• $384,900 for mortgages on two-family properties (up from $351,950 in 2001).

• $465,200 for mortgages on three-family properties (up from $425,400 in 2001).

• $578,150 for mortgages on four-family properties (up from $528,700 in 2001).

• Conforming loans in Alaska, Hawaii, Guam and the U.S. Virgin Islands are 50 percent higher.

FHA Financing

The top single-family Federal Housing Administration (FHA) loan amount this year is $239,250 in the continental United States, and 50 percent higher in Alaska, Guam, Hawaii and the Virgin Islands.

Like conventional financing, the upper limit for FHA financing also changes each year. While no official announcement for the 2002 FHA loan limit has been made, the largest FHA loan for an owner-occupied single-family house in a "high-cost" area is pegged at 87 percent of the conventional loan limit. In this case, 87 percent of $300,700 is $261,609.

Not all areas are regarded as "high cost" and in such locations lower FHA limits apply. For specifics, look for the official FHA announcement and be certain to check with brokers and lenders for the maximum FHA loan amount in your community.

For more articles by Peter G. Miller, please press here.

Published: November 29, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .