As expected, Fannie Mae and Freddie Mac announced an increase in conforming loan limits for 2019, increasing the borrowing power of home buyers, particularly first-time home buyers.
Why Conforming Loans are Important
Fannie Mae and Freddie Mac (the agencies) were initially organized to provide greater liquidity in the mortgage market. They do this by purchasing loans made by lenders (including banks and other institutions) and then borrowing money by selling bonds, which are backed by the mortgages in a pool. They use the money raised by selling bonds to buy more mortgages, and the cycle starts all over.
The nationwide limit will be $484,350, a 6.9 percent increase from 2018, and the high-balance conforming loan limit will be $726,525.
However, they are also backed by the U.S. government, meaning that if the market collapses and the investors lose money, the government will step in and cover some of the losses.
This makes investors feel warm and fuzzy, and also makes them more likely to invest at lower investment yields, which are passed on to consumers as lower interest rates. As a rule, then, conforming loans are less expensive, allow higher loan-to-value ratios and are easier to qualify for than non-conforming loans.
Conforming Loan Limit History and Background
Today, the agencies purchase most of the mortgages made in the United States. When your bank, credit union or mortgage company makes a loan, it must conform to the underwriting criteria the agencies set forth for loans they are willing to purchase – thus the “conforming” loan.
One of these criteria has to do with the size of the loan. Each year the agencies publish the maximum loan amount that they are willing to purchase. Each year the limits have been raised to reflect increases in home prices. In 1980, the conforming loan limit was $93,750, and in 2018 it was $453,100, so we’ve come a long way. The conforming loan limit was always a nationwide standard, until 2008.
In 2008, non-agency lending collapsed, and the agencies realized that they would need to step up to facilitate lending in high-cost areas of the country. A second tier was developed, known as the high-balance conforming loan limit. This limit is set to 125 percent of the median home price of a county, but never more than a nationwide limit. In 2018, that limit was $679,650.
New Conforming Loan Limits for 2019
On November 27, 2018, the agencies announced the new conforming loan limits for 2019. The nationwide limit will be $484,350, a 6.9 percent increase from 2018, and the high-balance conforming loan limit will be $726,525. If your county qualifies for high-balance limits, you can find out what the new high-balance limit is by visiting Fanniemae.com, and then clicking on “Loan Limit Lookup Table.” Please note this is a Microsoft Excel table, and you’ll need that installed on your computer to read it.
Lenders generally begin accepting loan applications at the new conforming loan limit by December 1 of the preceding year, so if you have been turned down recently because you just missed the conforming loan cutoff, call your lender again now!