There are two basic types of loans, those that are considered conforming and those that are non-conforming. These descriptions apply to loans that “conform” to standards issued by Fannie Mae and Freddie Mac. When lenders issue a loan using conforming guidelines the loan is then eligible for sale in the secondary market.
Selling loans allows lenders to free up more cash to continue making mortgages. One of the more important guidelines is how large the individual loan can actually be. Any loan amount above these limits falls in to the “jumbo” category. Jumbo loans will typically have interest rates that are 0.25% to 0.375% higher than conforming ones.
Nearly two out of every three residential home loans made in today’s marketplace is a conforming one. This type of volume also contributes to lower interest rates for conforming loans compared to non-conforming ones. Conforming loans can be used to finance a primary residence, second home or investment property.
Each October, the Federal Housing Finance Agency, or FHFA, reviews the national median home price and compares it to October of the previous year. From October 2018 to October 2019, home values increased by approximately 5.38%. This is the percentage increase that determines the new conforming loan limits for 2020.
The new values are announced in late November. For 2020, the new conforming loan limits will be $510,400, up from $484,350 in 2019. This is for a single-family residence. Loan limits increase a duplex, triple and fourplex, with limits set at $653,550, $789,950, and $981,700 respectively. If home values stay the same year-over-year or even fall, the loan limits remain the same for the following year.
In certain areas of the country where the median home values are much higher than in other parts of the United States, “high balance” conforming loan limits apply. High balance loans are still part of the conforming landscape and can be sold in the secondary markets. As long as the high balance loan is approved using Fannie or Freddie guidelines, the loan is eligible for sale.
High balance loans will have slightly higher interest rates compared to standard conforming loans but still a bit lower than what jumbo loans will offer. High balance loan limits vary by geography but can be as high as $765,000 for a single-family residence. Duplex, triplex and fourplex limits will be $980,325, $1,184,925 and $1,472,550 respectively.
As a result of these conforming increases, loan limits for other programs will rise as well. FHA “floor” loan limits, for example, are set at 65% of the conforming loan limit for most areas. FHA limits take into consideration the median home value for each Metropolitan Statistical Area, or MSA. This can mean an FHA loan limit might be higher in one county compared to another nearby county. Note, all FHA purchases must be owner-occupied, as do VA and USDA loans.
In the instance of a multi-unit property, the borrower must occupy one of the units as a primary residence. VA loan limits with zero down follow the conforming limits and we can expect the VA maximum loan to match the conforming limit. USDA does not have an explicit loan limit but instead base a loan amount on the location of the home and household income of all occupying the property over the age of 18. USDA loans can only be used in areas deemed as “rural.” These new limits will take effect as of January 1, 2020.
Some borrowers will seek to avoid high balance or jumbo loan amounts due to the slightly higher interest rates. This can be accomplished simply by putting more money down to get the loan amount to the desired level. Or, they can take out two mortgages instead of one, leaving the first mortgage at a lower loan amount and meeting the conforming limits.
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