In November 2016, the Federal Housing Finance Agency (FHFA) announced an increase in the maximum conforming loan limit for mortgages acquired by Fannie Mae and Freddie Mac in 2017. According to a press release, the 2017 maximum loan limit for one-unit properties will be $424,100 in most of the country, an increase from $417,000, and the first increase in the limit since 2006. In higher-cost areas, the conforming loan limit could be as high as $625,500. What does
this mean for those looking to buy or refinance this year? We explain below.
Understanding the Conforming Loan Limit vs. a Jumbo Loan
A conforming loan limit is the maximum size of a mortgage that Fannie Mae and Freddie Mac will purchase and/or guarantee. Both entities are restricted by law to refrain from purchasing single-family mortgages above this amount, and the amount differs based on geographic location. For example, loan limits increase drastically in certain high-cost areas, which include Alaska, Hawaii, Guam and the U.S. Virgin Islands. In these areas, the baseline loan limit for one-unit properties will be $636,150, but could be higher in specific locations.
Jumbo loans, in contrast, are loans issued above the conforming loan limit. In 2017, any mortgage over $424,100 will be considered a jumbo loan in most counties in the United States. While both conforming and jumbo loans offer competitive interest rates and allow buyers to choose from adjustable rate mortgages (ARMs) and fixed-rate programs, jumbo loans require much more documentation and have stricter underwriting guidelines than conforming loans. Additionally, you should be prepared to show a jumbo lender a minimum of 12 months’ reserves for future mortgage payments as well as the down payment and closing costs.
How the limit is derived
The Office of Federal Housing Enterprise Oversight (OFHEO) sets the conforming loan limit every year using a formula established under the Housing and Economic Recovery Act of 2008 (HERA). The limit is adjusted each year to reflect the changes in the national average home price.
The impact on buyers and those refinancing
The increase in the maximum conforming loan limit means that you may be able to take out a higher mortgage and still qualify for a conforming mortgage. The benefits of qualifying for one of these loans are that they are backed by government and quasi-government agencies, like the Federal Housing Administration (FHA), the Veterans Administration (VA), and Fannie Mae and Freddie Mac. Additionally, as mentioned above, conforming loans often have better interest rates than non-conforming loans because many lenders view them as less risky investments.
Purchasing or refinancing your home is not a decision to take lightly, and it is imperative that you understand the many different options that are available to you.
By Michaela Phillips, Guaranteed Rate, Inc.
Michaela Phillips is the Vice President of Mortgage Lending at Guaranteed Rate, Inc., the 8th largest retail mortgage company in the country. Since entering the mortgage industry in 1994, she’s consistently been a top producer. Being a VP at Guaranteed Rate offers many advantages to her and her clients including unparalleled customer service, efficiency, and most importantly competitive rates. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS:312874.