By Joe Silver
In late November, the Federal Housing Finance Agency (FHFA) announced that it would increase the maximum conforming loan limits for loans that are acquired by Fannie Mae and Freddie Mac in 2017. This means higher loan amounts for first time home buyers and more opportunities for homeowners to refinance with raised loan limits on Fannie Mae and Freddie Mac home mortgages. This is the first increase in the baseline loan limit in more than a decade, and is a strong sign of economic recovery.
For most of the United States, the 2017 maximum loan limits for single family properties will be $424,100, which is an increase of $7,100 from 2016.
The Housing and Economic Recovery Act of 2008 set up the original baseline loan limit of $417,000. The Act requires the limit to be changed every year to reflect any fluctuation in the average home price for the US.
However, after several years of dropping home prices, the Act made it clear that the baseline loan limit would not be raised again until the average home price in the US returned to the pre-recession level. Until 2016, the average home price across the country was under the level of Q3 in 2007, so the baseline had not been raised.
In late November, the FHFA published its Q3 2016 Housing Price Index, and it made it clear that average US home prices are above the level of Q3 2007.
US median home prices reached a record high in 2016, with a median price of $247,600. This is up 80% from 2006. Prices crashed to a low of $154,000 in 2011.
Fannie Mae and Freddie Mac purchase mortgages from lenders, put them into securities, and guarantee them to investors that the principal and interest will be repaid. This is a major reason that 30 year mortgages are widely available in the United States at affordable prices.
This increase in the loan limit is important for the housing industry. If the loan on the home you want to buy is higher than the maximum loan limit, it is defined as a jumbo mortgage. This means that there are more rigorous underwriting requirements, which often include more cash reserves, larger down payments, and higher credit score standards.
Experts in the mortgage industry note that many first time buyers in more expensive areas can be shut out of the home buying market because the home they want is too costly to qualify for government backing. The loan limit can be raised in certain high cost areas, such as Suffolk County MA, where the limit is currently $523,000, but even that is not always high enough for such areas.
Many homebuyers in more pricey areas have good jobs and incomes, but often cannot afford a 10% or 20% down payment, which is what a jumbo mortgage may require.
The announcement from FHFA should mean that the FHA will loosen its borrower requirements and will raise its own loan limit standards. The FHA usually sets its loan limit at 65% of the Fannie and Freddie limit, which would mean the new FHA limit will be approximately $275,000.
Generally, an increase in conforming loan limits is a boon for borrowers because it means that more homes qualify for US government guarantees. If the US government guarantees the mortgage against default, it means that more lenders will offer reasonably priced loans with reasonable requirements that more people can meet.
For example, FHA loans currently can be as much as $275,000 to get government backing. With government backing these FHA mortgages, it means that more mortgage lenders are willing to give loans to people with lower credit scores and lower down payments.
This opens up home ownership to millions more people every year. With FHA home mortgages, you may be able to get a loan with only 3.5% down and a credit score as low as 580. Of course, the higher your credit score, the more likely the loan will be approved, but government backing of the loan means that many more lenders are available.
Without government backing, the lenders will nearly always require higher credit scores and bigger down payments, thereby shutting many Americans out of the housing market.
If the US economy continues to look up, we can expect conforming loan limits to be raised in the coming years again. This also will be a good thing for many homebuyers because more home building and home buying generally means higher interest rates. So, if the loans are guaranteed by the government, the mortgage interest rates will not be as high in many cases.
It is very important to the health of the housing market for more home loans to be guaranteed by the government. While that in theory does risk a repeat of the mortgage meltdown of a decade ago, the federal government has programs available that will work with homeowners who get in trouble on their mortgages.
Sometimes the US government will allow the homeowner who is in trouble to refinance without a new appraisal, so there is a reduced risk of mass defaults.
The good news is that higher loan limits on Fannie and Freddie translates to more opportunities for the U.S. housing sector in 2017 and beyond. The US government wants to ride the fine line between encouraging people to buy homes, and preventing country wide mortgage defaults. The big gainer usually is homebuyers with average credit scores and less for down payments.
Sources: Fannie Mae, Freddie Mac, Signet Mortgage
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