Government increases conforming mortgage limits for 2020

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Rising home values spurred the Federal Housing Finance Agency (FHFA) to increase conforming loan limits in most of the country. Starting in 2020, the maximum limit for single-family homes will be $510,400, a more than 5 percent increase from 2019’s $484,350.

Conforming loans are mortgages backed by Fannie Mae and Freddie Mac, which make up the vast majority of the home loans issued in the U.S.

In pricey metro areas, where the median home values are more than 115 percent of the conforming loan limits, FHFA expanded loan limits to $765,600, 150 percent of the baseline loan limit. The majority of these areas are in California, New York and Washington state.

Alaska, Hawaii, Guam and the U.S. Virgin Islands have special statutory provisions that call for unique loan limit calculations. The 2020 loan limit in these places will be $765,600 for single-family homes.

There were only 43 counties across the country that did not get a boost in loan limits.

What are conforming loan limits?

A conforming loan is one that adheres to rules set by housing finance agencies Fannie Mae, Freddie Mac and Ginnie Mae. More than 90 percent of mortgages are backed by these agencies, which makes these limits an important aspect of the homebuying process.

The agencies set the size of the loans they are willing to back based on home prices in each area. This means as home prices rise, so will loan limits.

These limits are important to homebuyers because they accommodate the rising home prices and allow them to borrow more to the limit of what’s called a conforming loan. A lift in the limits is a way for buyers to keep pace with a more-expensive market.

“If house prices have gone up by 7 percent, then you need a 7 percent higher mortgage. It’s pretty automatic. Every time prices rise, the FHFA raises mortgage limits,” says Ed Golding, former FHFA commissioner.

The FHFA bases national conforming loan limits for mortgages that finance single-family homes based on their House Price Index report. In the latest report, the average U.S. home value between the third quarters of 2018 and 2019 increased by 4.9 percent. Hence, the corresponding rise in loan limits.

Homebuyers who desire mortgages that exceed the conventional loan limit need a jumbo loan. Jumbo loans are privately-backed mortgages that typically have more stringent underwriting rules, such as excellent credit scores. Since jumbo loans are not backed by the big agencies, lenders assume full responsibility, which heightens their risk. There’s no limit to the amount of a jumbo loan, but it will depend on your credit history, assets, and employment history.

Limits for high-cost counties

In about 100 counties, which are deemed high-cost areas, such as San Francisco, Rockville, Maryland, and New York, the maximum loan limit is 150 percent higher than the rest of the counties, this is the maximum overage from the baseline limit the FHFA allows. In 2020, high-cost areas will also see a 5.37 percent hike from $726,525 to $765,600.

Although higher loan limits might seem like a way to help boost sales in an otherwise sluggish market, this probably won’t be the case. Other factors such as tight inventory, lack of entry-level housing and rising rates are still holding back buyers and keeping the market tight.

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