Fannie Mae and Freddie Mac purchase loans on the secondary market. However, they cannot purchase every loan – they can only purchase those which meet certain guidelines, including those with a maximum loan amount. This loan amount, called the conforming loan limit, increased to $417,000 in 2006 and has remained at this level since then. There are certain areas throughout the United States where the cost of living is higher, which results in a higher conforming limit for these areas.
Even though conforming limits remained the same for so many years, they are a drastic improvement on previous levels. Starting in the 1970s, the conforming limit was just $33,000. Over the years, this limit increased until they reached their current level of $417,000 in 2006.
The FHFA required the conforming loan limits to stay at their current level until the house price index (HPI) exceeded pre-crisis levels. The pre-crisis levels are those levels the housing index reached in 2007, after which they decreased dramatically. During the second quarter of this year, the HPI hit the 2007 level, which means the conforming loan limit might increase for next year. This would signify the first increase since 2006.
The FHFA Input
The FHFA contemplated increasing the conforming loan limit during 2015 based on home sales during the year, which included conforming and government-backed loans. However, they did not reach an agreement to increase the prices in 2015. The decision occurred because of the median home price of homes during the 3rd quarter of 2015. At that time, the prices did not exceed the prices during the 3rd quarter of 2007, the baseline for conforming loan increases. However, the FHFA did agree to increase the conforming loan limits in more than 40 high-cost areas in 2016.
Determining Median Home Price
The Housing and Economic Recovery Act of 2008 governs how the conforming loan limit changes. Right now, the median home sales price determines whether conforming loan limits increase or not. This is also how officials determine how much the loan limits should increase in high-cost areas, where the loan limit sometimes exceeds 150% of the national conforming loan limit.
The Benefits of Higher Conforming Loan Limits
Many homebuyers prefer to secure a conforming loan. If the loan limits increase, they are able to purchase a more expensive home without the worry of qualifying for a jumbo loan. Fannie Mae and Freddie Mac backed loans have easier guidelines and lower interest rates, both of which make borrowers feel more comfortable in their decision to purchase or refinance a home.
Getting Around the Lower Limits
While we wait for conforming loan limits to increase, borrowers who wish to upgrade can do several things:
- Put more money down on their purchase – This decreases the amount you need to borrow, which can lead to a conforming loan despite the stagnant $417,000 loan limit
- Secure a second mortgage – Borrowers who cannot afford a larger down payment can secure a second lien as piggy back loan, enabling them to secure conventional financing without going over the limit
Whether the FHFHA will increase conforming loan limits for 2017 is still up in the air, but it does look promising. If the median home prices do not go below pre-crisis levels, the conforming limits could increase. Only time will tell and until then, you have options to help you secure the housing you desire.