December 12, 2019
EXCERPT: The FNMA and FHLMC will increase conforming loan limits for 2020, though the increases are smaller compared to previous years.
The FHFA establishes maximum mortgage loan amounts that are eligible for backing by Freddie Mac and Fannie Mae.
Just about every year, mortgage loan limits increase, largely due to appreciation in property values. But in 2020, these loan limit increases are slated to be smaller compared to previous years, according to a recent article from American Banker.
Despite the smaller increases, loan limits for the majority of Fannie Mae and Freddie Mac mortgages will top the $500,000 mark for the first time as the New Year rings in, with the maximum limit hitting $765,000 in higher-cost centers.
Loan Limit Increases Smaller Than Previous Years
The national standard one-unit conforming loan limit will reach $510,400 from this year's $484,350 as a result of increases in average home prices across the nation. That's just a roughly 5 percent change compared to loan limit increases of almost 7 percent over the past couple of years.
A conforming loan is a home loan that is equal to or less than the maximum loan amount established by the Federal Housing Finance Agency (FHFA) and is eligible for Freddie Mac and Fannie Mae backing. Conforming loan limits represent the maximum size of a mortgage that Freddie Mac and Fannie Mae will purchase or guarantee.
These limits are adjusted each year to reflect fluctuations in home prices from county to county. The majority of counties are assigned a baseline conforming loan limit, but variations may exist based on economic differences across regions.
For instance, regions where 115% of the median property value is higher than the baseline conforming loan limit in the area will have their maximum loan limits set higher. The ceiling on these limits is 150% of the baseline loan limit.
Any mortgage amount over the conforming loan limit cap is considered a jumbo loan. In this case, since the loan amount exceeds the conforming loan limit, the loan is not eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac. Jumbo loans are designed to finance luxury homes or properties in competitive real estate markets.
Fannie Mae and Freddie Mac loan limits will top $500,000 for the first time next year.
Higher-Cost Areas Qualify For Higher Conforming Loan Limits
Specific counties in the US have been designated as higher-cost areas that qualify for high-cost conforming loan limits, particularly in Washington state, California, Colorado, Wyoming, Idaho, Utah, South Florida, New York, New Jersey, Massachusetts, the District of Columbia, North Carolina, Virginia, Tennessee, and Georgia. Since prices in many counties in these states have much higher home prices compared to state and national averages, their conforming loan limits are higher.
Loan limits help to protect banks and lenders by preventing excessive loans from being given to one borrower and promoting loan diversification. They're also designed to help consumers who are buying the average house in a particular area rather than the mansion in the neighborhood.
Financial Institutions Encouraged to Revisit Their Loan Portfolios
Banks and lenders may be required to comply with the rules set forth in regards to loan limits to borrowers, but they should also be prudent on their own accord when it comes to ensuring their loan portfolios are sound. Banks are encouraged to regularly assess their loan portfolios and the assets contained within them. Any faulty assets should be sold off with strong and lucrative ones acquired in their place. Fortunately, there is a high-priced and robust market for under-performing bank assets, and Garnet Capital can help banks sell off these assets and acquire more robust ones.