By accessing more capital, consumers can buy houses, cars, and other goods, which sends ripples through the entire economy. But what exactly are conforming loan limits? And why do they matter?
Conforming loan limits, as defined by the Federal Housing Finance Agency (FHFA), are the maximum loan amounts that Fannie Mae and Freddie Mac will purchase in a given year. Generally, these limits are based on the average cost of housing in an area. The higher the limit, the more houses a borrower can afford and the more mortgages Fannie Mae and Freddie Mac can buy. However, when conforming limits are too low, it can limit the number of mortgages lenders are able to provide and contribute to higher mortgage rates.
In response to the economic uncertainty caused by the COVID-19 pandemic, the FHFA increased conforming loan limits for 2021. The new limits are set at $548,250 for one-unit properties in most areas, up from $510,400 in 2020. That’s a 7.4% increase, the highest since 2006. This increase in loan limits should help borrowers access more capital to buy or refinance their homes.
A higher loan limit also helps borrowers who are looking to access jumbo loans. Jumbo loans are loans above the conforming loan limit. These loans typically come with higher interest rates and stricter underwriting requirements than conforming loans. With the new loan limits, some borrowers may be able to access a conforming loan instead of a jumbo loan and get better terms.
The increased loan limit also provides a boost for the housing market. When more people can access larger loans, they may be more likely to purchase a home. This can help drive up home prices, resulting in a more active housing market. It is also beneficial for developers and builders who can now build larger, more expensive homes.
For many borrowers, the increase in loan limits could mean the difference between being able to purchase a home and being denied a loan. The higher loan limits provide more access to capital, which can help borrowers find homes that fit their needs. It is also important to note that while the conforming loan limits have been increased, the basic qualification criteria for a loan remains the same. Borrowers must still meet the requirements established by the lending institution.
The increase in conforming loan limits provides a much needed boost in access to capital for potential homebuyers. It also supports the housing market and provides a boost to a key economic sector. As we continue to move through the uncertain times of the COVID-19 pandemic, the increased loan limits could be a vital tool for keeping the housing market thriving.
Given the economic fallout of the COVID-19 pandemic, the US Federal Housing Finance Agency (FHFA) recently announced a 7.4% increase in the conforming loan limits for 2021, from $510,400 to $548,250. The increase of the conforming loan limit aims to help individuals access more capital to purchase or refinance their homes, thus providing a much-needed boost in capital for potential homebuyers and for the housing market alike.
Conforming loan limits are the maximum loan amounts that two major government-sponsored enterprises, namely Fannie Mae and Freddie Mac, will purchase in a given year. It is based on the average cost of housing in an area and is generally seen as a helpful measure for those seeking conventional loans. When the limits are too low, banks are unable to issue more mortgages resulting in higher mortgage rates. In turn, this has a negative impact on the housing market, as fewer people are able to purchase a home. Therefore, the increase in loan limits should lead to more people accessing larger loans and, consequently, more people being able to purchase homes.
The higher loan limits would also benefit those looking for jumbo loans - usually loans that exceed the conforming loan limit which tend to have stricter underwriting requirements and higher interest rates. With the new loan limits, more borrowers may qualify for a conforming loan instead.
This increased availability of capital in the market can be expected to bolster the housing market since people will be more likely to purchase homes. Developers and builders, as well, stand to benefit from this since they will now be able to build larger, and more expensive homes.
It is critical to recognize that while the conforming loan limits have been increased, borrowers must still meet the usual loan requirements determined by the lender. Moreover, the increase in loan limit may not significantly affect homeowners with good credit who already qualify for good interest rates. Homeowners with poor credit scores may still face difficulty in obtaining a mortgage regardless of the increased loan limit.
In conclusion, the FHFA’s increased loan limit could result in a more accessible housing market for much of the population, both now and in the long term. This could prove to be a vital tool in keeping the housing market thriving amidst the global uncertainty caused by the coronavirus.
This article was contributed on Oct 14, 2023
