It’s a new year, and the Federal Housing Finance Agency (FHFA) has raised the limits on mortgages that can be acquired by Fannie Mae and Freddie Mac. Why should you care about the changes to FHFA loan limits in 2020? If you are planning to buy a home in 2020, these changes could increase your purchasing power by making it easier for you to get a larger loan. To understand why, you will need to know a bit about conforming loans and how they work.
The Changes to FHFA Loan Limits in 2020
In November of 2019, the FHFA announced that the conforming loan limit for one-unit properties in 2020 would rise to $510,400, an increase of more than $25,000. According to the agency’s Housing Price Index, U.S. home prices rose by 5.38% between the third quarters of 2018 and 2019. The Housing and Economic Recovery Act requires the baseline conforming loan limit to reflect the average change in the country’s home prices, so the FHFA is lifting the conforming loan limit accordingly. In certain high-cost areas where 115% of the local median home value is greater than the baseline conforming loan limit, the loan limit will be even higher.
So what is a conforming loan? What does raising the conforming loan limit mean for borrowers?
Defining Conforming Loans
The Federal National Mortgage Association, which is more popularly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, are major players in the mortgage market. As The Balance explains, the federal government created these organizations to bolster the secondary mortgage market. By buying mortgages from lenders, they provide funds that lenders can use to make new loans. This enables lenders to supply more loans, making mortgages more accessible and stimulating the housing market.
Fannie Mae and Freddie Mac will not purchase any old mortgage. As Investopedia explains, they will only purchase loans that meet their funding criteria. While this also includes guidelines for the borrower’s credit, their loan-to-value ratio, their debt-to-income ratio, and certain documentation, the size of the loan is a major factor; loans must fall at or under the FHFA loan limit.
Loans that are eligible for purchase by Fannie Mae or Freddie Mac are known as conforming loans. What about loans for amounts in excess of the FHFA conforming loan limit? They are called nonconforming or jumbo loans.
The Advantages of Conforming Loans
Why should borrowers care about whether their preferred loan is conforming or jumbo? Because Fannie Mae and Freddie Mac provide a reliable secondary market for conforming loans, lenders generally prefer to provide conforming loans. As a result, using a conforming loan brings real perks, according to NerdWallet. Borrowers will normally find it far easier to qualify for a conforming loan. Lenders tend to be less strict about credit score and credit history and will generally accept a smaller down payment. Plus, borrowers with decent credit will often be able to secure a lower interest rate for a conforming loan.
In contrast, borrowers seeking riskier jumbo loans typically undergo greater scrutiny, and they’ll often need to make a 20-percent down payment and accept a higher interest rate if they do get approved. For these reasons, it’s not surprising that many borrowers limit themselves to conforming loans.
Ultimately, the changes to FHFA loan limits in 2020 raise the threshold between conforming and jumbo loans. As The Mortgage Reports indicates, larger conforming loans mean that eligible borrowers will be able to secure more funds to buy a home without having to deal with the additional challenges involved in securing a jumbo loan. In addition, the changes raise the loan ceiling for borrowers who might not be able to qualify for a jumbo loan.
Whatever your reason for choosing a conforming loan, with more funds in your pocket thanks to the lift in conforming loan limits for 2020, you will have more purchasing power as you work to buy your dream home. And whether you are interested in buying, renovating, or refinancing a home, PrimeLending of Denver can help. Contact us today to get started.