In a recent news release, the Federal Housing Finance Agency announced an increase on the maximum conforming loan limit by nearly $100,000 since 2016.
Starting January 2020, the conforming loan limits for Federal National Mortgage Association (aka Fannie Mae) and the Federal Home Loan Mortgage Corporation (Colloquially known as Freddie Mac) will be more than $510,000, an increase from $484,350 in 2019. The new conforming loan limit applies for the one-unit properties.
For the areas where the local median home value is above the baseline conforming loan limit, the borrowers will enjoy a higher maximum loan limit. Over a period of one year, the median home values have increased generally, and particularly in the high-cost areas. Therefore, the maximum loan limits will increase in many counties. For the high cost areas, the new ceiling loan limit for a one-unit property will rise to $765,600 or 150% of $510,400.
However, for areas like Alaska, Hawaii, Guam and the US Virgin Islands where a special statutory provision exists, the baseline loan limit will be $765,600 for a one-unit property.
The recent announcement by FHFA marks the fourth straight year the conforming loan limits increased. This is after an entire decade from 2006 to 2016 without announcing any increment. Back in the year 2017, the conforming loan limit was set at $424,100, and increased to $453,100 in 2018, before the 2019 limit was set at $484,350 and now the loan limits will top $510,000 in 2020.
What does this mean for the mortgage borrowers?
First, it is clear that the FHFA appreciates the rising home prices in all the counties in the US. With the increment in the conforming loan limits, (for the loans that are insured by Fannie Mae and Freddie Mac), more homebuyers will have access to safe and more affordable mortgages. This is according to the California Association of Realtors, who issued a statement following the latest news release by FHFA. Therefore, the conforming loan limits increase means that the cost of mortgages will remain manageable for the borrowers who qualify. Further, it is expected that housing affordability will improve across the counties in the US, including the High-cost Areas.
In fact, the National Association of Realtors® in conjunction with regional Realtors® bodies have been advocating for higher conforming loan limits. The recent increment is an indication that the country is headed into the right direction, trying to tackle the rising cost of housing. Therefore, the cities that have been experiencing high median home prices will benefit from the new increment.
Consider that the conforming loan limit is a major determinant of the maximum mortgage size that the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) can guarantee. This is unlike the none-Conforming and Jumbo Loans that come with strict and tighter underwriting standards.
In fact, sometimes the none conforming loans carry higher mortgage interest compared to Fannie Mae and Freddie Mac. This increases the monthly mortgage repayments making it difficult for families to afford housing.
How Does the Conforming Loan Limit work?
The conforming loan limit is set as per the permanent formula established under the Housing and Economic Recovery ACT of 2008. The conforming loan limit is also designated by the county, with a majority of the counties assigned baseline conforming loan limit.
Note that there can be variations on the conforming loan limit, as per the regional economic differences. This applies in the case of areas where the 115% of the local median home value exceeds the baseline conforming loan limit.
For those areas, the maximum loan limit is set higher. This is in accordance with the Housing and Economic Recovery Act that sets the maximum loan limit for those areas.
Moreover, some special statutory provisions within HERA, establish a different loan limit calculation for four counties, namely Alaska, Hawaii, Guam, and the US Virgin Islands. This is the reason why in 2020 as well as previous years, the conforming loan limits for these areas tend to be notably higher compared to the other areas. This is because; HERA designates these areas as High-Cost Areas.
The Baseline National Conforming Loan Limit
According to the Housing and Economic Recovery ACT of 2008, the Baseline Loan Limit should be adjusted annually. This is in accordance with the National Average Home Price. Therefore, HERA specifies that FHFA should establish and maintain a formula for tracking the National Average Home Price.
Therefore, in determining the 2020 maximum conforming loan limit, the FHFA used the seasonally expanded-Data HPI. As per the index used by FHFA, the increase was calculated as 5.378 percent.