The Federal Housing Finance Agency (FHFA) is responsible for setting “conforming loan limits” which is simply a ceiling that the government agency sets when it comes to the size of loans they will purchase or guarantee. In other words, it is the maximum size of a home mortgage that the government will back.
The news from last week is that Fannie Mae and Freddie Mac are raising loan limits to more than $510,000, which is up over $25,000 compared to the 2019 loan limit of $484,350. The increase is a result of rising home prices which on average went up 5.38% between the third quarter of 2018 and the third quarter of 2019. This is why the conforming loan limit will increase by the same percentage in 2020.
The loan limits were set in the aftermath of the 2008-2009 by the Housing and Economic Recovery Act of 2008, which established the baseline loan limit of $417,000 at that time. The legislation mandates that if home prices drop for a set period of time, the baseline limit cannot rise until prices return to pre-drop levels.
While some counties and markets that see higher than average baseline home values will have a higher ceiling, Michigan residents will see the national $510,000 ceiling in 2020. Additionally, there are special provisions established for loan limits in Alaska, Hawaii, Guam and the U.S. Virgin Islands. Overall, the maximum conforming loan limit will be higher in 2020 in all but 43 counties in the U.S.
So what does this mean for home owners and home buyers? For those with mortgages valued between $484,000 and $510,000, you probably needed to get a jumbo mortgage to purchase your home and therefore have a higher rate than a conventional mortgage. If that is the case for you, 2020 is your year to refinance to a conventional mortgage and bring your rate down.
For buyers that are in the $500,000 price point, 2020 will be a great year to buy because you’ll have more negotiating room while remaining within the loan limit for conventional mortgages. So if you had a maximum price point of $484,000 due to the conforming loan limit rules, you can now bump it up and potentially have a large pool of homes to select from.
To sum it up, if you currently have a mortgage for a home valued between $484,000 and $510,000, you absolutely should speak with a mortgage professional about refinancing in 2020. If you’re looking to buy around that price range, waiting until January might be wise so you can take advantage of the lower rates offered for conventional mortgages vs. jumbo mortgages.
It will be interesting to see how this change will impact the market, but there is certain to be some activity as a result of it.
