Each year, the Federal Housing Financing Agency (FHFA) issues a statement about the limitations on how much people can borrow for conventional mortgages. This is known as the conforming loan limit and it has important implications for homeowners.
In 2018, the FHFA is raising the loan limit for the second consecutive year. This is good news for homeowners looking to purchase a home this year. It’s also good news for those looking to refinance.
Let’s take a look at some of the specific changes to the loan limit and analyze how it’s going to impact the housing market overall.
Loan Limit Rises To $453,100
Loan limits increased for the first time in 11 years in 2017. The conforming loan limit is increasing again in 2018, thanks to the rising cost of purchasing a home. It’s also due to people’s penchant for “buying bigger”.
According to the National Association of Realtors, homes costing less the $250,000 have increased a bare .06%. Houses that cost more than $500,000 have increased more than 14%, on the other hand.
Limitations In High-Cost Areas
Loan limits are not one-size-fits-all. There are two levels of loan limits, due to this fact. There’s the baseline conforming limit, which is the standard. Then there’s a higher rate for higher-cost areas.
Higher amounts of loan limits are available when the average price of a house is 115% higher than the baseline price.
The Housing and Economic Recovery Act (HERA) decides the conforming loan limit. They also determine the upper cap on loan limits, which cannot exceed 150% of the baseline price. The upper limit for one-unit properties is $679,650, 150% of $453,100.
What Happens When The Price Of A Home Exceeds The Loan Limit?
The loan limit applies to the amount of a loan, not the cost of a house. To illustrate why this matters, consider a home in a higher-priced area costing like Boulder, Colorado. The loan limit in Boulder County is $578,450.
If a home were to cost $1,000,000 (not a far stretch in this popular mountainous region) and the homeowner puts a down-payment of $450,000, the balance determines the homeowner’s eligibility for a conforming loan.
The $550,000 balance falls under Boulder County’s loan limit, so the home would be eligible.
If a homeowner needs to finance above their local conforming loan limit, they can consider taking out a piggyback loan, meaning when the first and second loans are opened simultaneously.
Homeowners only qualify for piggyback loans when putting down a 20% down payment, however.
Rising loan limits are a good sign for the real estate market. They’re meant to help homeowners keep up with rising housing prices and to avoid real estate bubbles. They make it easier for people to purchase their first homes, which were otherwise out of reach.
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