December 2019 – The Federal Housing Finance Agency (FHFA) announced that it’s raising the conforming loan limits for Fannie Mae and Freddie Mac to $510,400 for most areas of the U.S. That’s up from $484,350 in 2019. In highest cost of living cities, the amount was raised from $726,525 to $765,600. The higher cost of housing has prompted loan limit increases each year since 2016. Prior to that, the FHFA hadn’t increased conforming loan limits between 2006 and 2016 at all.
Who Does This Affect?
The FHFA’s increase affects people who require a higher loan amount than the previous $480,350. Before the increase, these borrowers would likely have turned to jumbo loans, which are non-conforming loans with greater lending restrictions and are harder to qualify for. The new higher cap especially helps more qualified buyers to own homes in high cost of living areas.
Can I Afford More House?
Some home buyers might wonder, since the loan limit was raised, Does this mean I can afford more house? The loan limit increase definitely means an expansion of credit, so yes, many will be able to afford more house. For people living in high cost real estate areas, the expansion of credit can mean a new opportunity for getting any house at all. The caveat, of course, is that you still need to qualify for the loan. Obviously loan qualification depends on your financial situation, what you earn, your debt-to-income ratio, credit score, and how big of a risk a lender defines you. Potential buyers must meet with a lender to determine what they can afford, and as always, it’s recommended you meet with more than one lender.
Is My Home Now Worth More?
With the conforming loan limit, some home sellers might wonder, Does this mean I can get more for my house? In short, no, at least not for this reason. Raising the ceiling for conforming loans doesn’t affect home value. It’s a response to rising home values. Your home’s value is based on supply and demand, its amenities, condition, location, and what buyers are willing to pay at a given point in time. It’s likely your home is worth more today than last year, and if so, it would be due to market conditions and factors listed above, not the FHFA’s decision. Consult with a Realtor to learn what your home is worth if you’re interested in selling.
A Simplified Look at Fannie Mae and Freddie Mac’s Role in Home Loans
It’s important to point out the Fannie Mae and Freddie Mac do not issue mortgages. Instead, they buy mortgages in bundles from lenders who issue them to borrowers, then sell them as mortgage-backed securities that are sold to insurance companies, pension funds, investment banks, and other investors. By buying the bank’s mortgages, Fannie Mae and Freddie Mac guarantee the loans, which allows banks to lend far more than they would have without the insurance. This gives more people more opportunities to purchase and live in a home, which is why Fannie and Freddie were created in the first place.
Banks follow guidelines set forth by Fannie Mae and Freddie Mac for conforming loans. The new increases for Fannie Mae and Freddie Mac mean that banks can offer higher loan amounts to their borrowing customers. The new limits take effect on January 1, 2020.