Here in just a couple of weeks, some important economic data will be reviewed by the Federal Housing Finance Agency, or FHFA. This new data will then impact the new conforming loan limits for 2019. Mortgages are considered either a “conforming” or “jumbo” based upon the amount borrowed. Conforming loans that are underwritten to Fannie Mae and Freddie Mac standards are at or below $424,100 for 2018. Anything above that amount is considered a jumbo loan. One short caveat however, in areas deemed “high cost” there is another category called high balance conforming but in most parts of the country, a loan is either conforming or jumbo.
Historically, conforming loans have slightly lower interest rates compared to a jumbo loan. Conforming loans also ask for a lower down payment. Jumbo loans typically ask for a down payment of anywhere from 20 to 25 percent of the sales price. So, who sets these limits and how? Each October, FHFA reviews the median home values for the United States, more specifically the Housing Price Index, or HPI, and compares that number with the previous year’s data. If there is an increase in median home value from one year to the next, the conforming loan limit will be increased accordingly. For instance, if values increase by 5.0%, the conforming loan limits will be increased by 5.0% for the following year. The new limits are announced in November of each year. If values fall, the previous year’s loan limit will remain the same until the next evaluation.
Conventional conforming loans are by far the most popular choice among home owners and practically every single mortgage lender offers either a Fannie or Freddie loan. With such a large market share that also means more places to get a conforming loan which leads to more competition among mortgage companies. Lenders compete based upon service and rates and more competition keeps mortgage rates in check. That’s one of the reasons why interest rates from one lender to the next are very near one another.
We can anticipate higher conforming loan limits for 2019 as home values over much of the country have appreciated in value, we just don’t yet know by how much. But we will soon know once the HPI for 2018 is reviewed and released by the FHFA.
Written by David Reed