Fannie Mae and Freddie Mac Conforming Loan Limits Will Increase to $510,400
In late November 2019, the Federal Housing Finance Agency (FHFA) announced that the maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac will be increasing in 2020. Starting this year, the maximum conforming loan limit for one-unit properties across most of the United States will be $510,400, which is up by 5 percent from $484,350 in 2019.
The Housing and Economic Recovery Act (HERA) requires that the baseline conforming loan limit be adjusted each year to reflect the change in the average U.S. home price. According to FHFA's data, house prices increased an average of 5.38 percent between the third quarters of 2018 and 2019, thus accounting for the increase.
With the loan limit being increased for the fourth straight year, what can you expect it to mean for your mortgage business?
Conforming Loans Make Up the Majority of Home Loans in the U.S.
Conforming loans are mortgages that are backed by Fannie Mae and Freddie Mac. These mortgages are equal to or less than the dollar amount established by the conforming loan limit set by the Federal Housing Finance Agency (FHFA) and they make up the majority of the home loans issued in the U.S.
Because conforming loans are considerably more popular than nonconforming loans or jumbo mortgages, mortgage companies can expect things to remain stable in terms of applications, although stiff credit requirements may impact some borrowers’ ability to take advantage of the new, higher limit.
Approval criteria for this type of loan include the borrower’s loan-to-value ratio (i.e., the size of the down payment), debt-to-income ratio, credit score and history, documentation requirements, and more. Loans are available with a down payment as low as 3 percent, but in order to take advantage of this, the borrower must be a first-time homebuyer. Plus, private mortgage insurance (PMI) of about 1.05% per year for 30-year loans up to $510,400 is required on the loan unless more than 20 percent is put down.
Conforming Loans in High-Cost Areas
While the baseline conforming loan limit will be rising by 5 percent in most areas around the country, there are some areas where the loan limit may be higher. This will be the case for high-cost areas where “115 percent of the local median home value exceeds the baseline conforming loan limit.”
The maximum loan limits in those areas will be based on a multiple of the area’s median home value, however, there will be a ceiling on the maximum, which will be no higher than 150 percent of the baseline loan limit. As a result, the new loan limit for one-unit properties in most high-cost areas will be $765,600 — or 150% of $510,400.
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