Even if you’re just dipping your toes into the housing market, you’ve probably come across a lot of language around home loans. For example, you may have heard the names “Fannie Mae” and “Freddie Mac.” These two are about to become your good friends, if they aren’t already.
After ten years of maintaining conforming loan limits on mortgages greenlighted for acquisition by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has now increased the conforming loan limit for the third year in a row.
So how will this change affect home loans—and you? Let’s start from the beginning.
Fannie Mae and Freddie Mac: A Brief Introduction
You’ve probably got an inkling that Fannie Mae and Freddie Mac aren’t people, and you’re right: they’re businesses.
Originally created by Congress, Fannie Mae and Freddie Mac ensure that the mortgage market is stable and affordable. The two companies provide ready access to funds (i.e. liquidity) to the businesses, like banks and mortgage companies, that supply loans to homebuyers.
In essence, these two companies buy mortgages from lenders and choose to either hold the mortgages in their portfolios or package loans into mortgage-backed securities (MBS) for sale. Lenders take the cash raised by selling mortgages to lend more money. This process both ensures that homebuyers and investors have a stable supply of mortgage money and also expands the pool of housing funds.
Fannie Mae and Freddie Mac are especially vital when the general economy is threatened and home loans can be more difficult to acquire. In times when the economy is booming (like now), they help consumers afford more expensive homes.
Conforming Vs. Non-Conforming Loans
Now that you know about Fannie Mae and Freddie Mac, it’ll be easier to understand the terminology around loans, specifically “conforming” loans and “non-conforming” loans.
A conforming loan is a mortgage loan that adheres to government-sponsored enterprise (GSE) guidelines. These loans conform to the most recent limit that the FHFA has approved. Conforming loans are popular because they often have lower rates and fees, plus the qualifications are well-defined across many lenders.
A non-conforming loan is a mortgage loan that doesn’t conform to these guidelines, either because the loan is too large or is backed by unusual collateral. While you can get a larger amount of money with nonconforming loans (also called “jumbo loans”), they are riskier for banks and have higher interest rates and fees.
Most in-the-know homebuyers follow updates on conforming loan regulations closely, since there are far more lenders willing to provide them.
Continually Increasing Loan Limits
For 2019, conforming loan limits will rise from this year’s total of $453,100 to $484,350—a 6.9% increase. For comparison, the limit only rose 1.7% in 2016 and then 6.8% in 2017.
Loan limits will increase more in certain areas where homes are more expensive than the average. For example, in Los Angeles, Marin, and Orange counties, the loan limit will be $726,525, or 150% of the baseline limit.
This is the third year that home loan limits have increased—reflecting the growing economy and cost of living across the country. Home prices are still on the rise, which necessitates this third straight increase in the conforming loan limit. In fact, the FHFA noted that home prices in all 50 states and the District of Columbia increased since the third quarter last year.
What This Latest Increase Means For You
Even with the help of the typical 30-year mortgage, which is a trademark of the U.S. housing market and unheard of in most other developed countries, home prices can seem high. You might have been looking at listings and wondering how you could possibly afford your dream home at the current market rate, which seems to rise day after day. This conundrum homebuyers have faced is exactly why the FHFA has increased the conforming loan limit.
If the most appealing homes seemed just out of your reach before, they are now within your grasp. Plus, when you work with a home buying intelligent assistant like me, you’ll simplify the entire process of dealing with the challenging housing market.
I can make an educated guess about suitable home prices based on your income and the recent loan limit adjustment. Considering this vital information, I’ll help you discover and explore affordable homes you love while reducing the typical manual legwork needed to figure out fitting price points. Once you select the perfect home, I can even help you choose your loan lender and ensure they meet deadlines for your purchase transaction.
It’s easy; just chat with me, and we can navigate these new home loan limits together.
