Staples Group Mortgage | St. George, Utah

Loan Limit Increase for Conventional Loans

Fannie Mae, Freddie Mac Loan Limit Increases to more than $510,000


In a recent news release, the Federal Housing Finance Agency announced an increase in the maximum conforming loan limit by nearly $100,000 since 2016!

Starting January 1, 2020, the conventional loan limits for Fannie Mae and Freddie Mac will be more than $510,000, an increase from $484,350 in 2019. This new update applies to one-unit properties only.

For the areas where the cost of living is higher, there will be an increase beyond this baseline limit depending on the county. Over the last year, the median home values have increased generally, and particularly in the high-cost areas. 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.

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, 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 stated the latest news release by FHFA. This conforming loan limits increase allows the cost of mortgages will remain manageable for borrowers who qualify. Further, it is expected that housing affordability will improve across the counties in the US, including the High-cost Areas.

The National Association of Realtors® in conjunction with regional Realtors® have been advocating for higher conforming loan limits. The recent increment is an indication that the country is headed in 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.

Sometimes the non-conforming loans carry higher mortgage interest compared to Fannie Mae and Freddie Mac loans. This increases the monthly mortgage repayments making it more difficult for families to afford the mortgage.

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 following 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 under 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.

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