The What, Where, and Why of Conforming Loan Limits for 2018

The What, Where, and Why of
Conforming Loan Limits for 2018

If you read the news or follow announcements made in regards to credit and finance, you may have seen the recent announcement (11/28/2017) by the Federal Housing Finance Agency (FHFA) addressing maximum conforming loan limits on one-unit properties ...

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The Federal Housing Finance Agency (FHFA) was created in July of 2008 as part of the Housing and Economic Recovery Act of 2008 in response to the housing collapse taking place.  Its mission is to provide oversight to the Government Sponsored Enterprises (GSE)  Fannie Mae, Freddie Mac, and Banks.

Two separate categories of Loan Limits are established by the FHFA.    The two (2) categories of loan limit are "General" and "High-Cost", referring to Geographical areas of the country.  

These Loan Limits were established as a protection for the GSE Agencies (Fannie Mae and Freddie Mac) in the event of a future Foreclosures.  Each category of Loan Limit is seasonally adjusted to reflect changes taking place in the Nation's home price average.

In particular, the "High Cost" category was established to allow higher loan amounts above the General Loan Limit, so as to not choke off ongoing recovery in higher-cost housing markets such as Washington DC, Alaska, Hawaii, and more.  
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But you probably want to know:

  • Who decides when the Loan Limit should be increased?  
  • How is the Limit determined?

The Housing and Economic Recovery Act (HERA) 
requires that: 

     #1.  The baseline loan limit is reviewed each year to reflect the changes in the national average home price.  HERA specifies that the Federal Housing Finance Agency  (FHFA) "establish and maintain" an index for tracking average home prices for this purpose.  In May 2015, FHFA published a Notice and Request for Input announcing its plans for using the seasonally adjusted, expanded-data HPI (House Price Index) for this purpose.

     #2.  In determining 2018 maximum loan limits under the terms of HERA, FHFA used the seasonally adjusted expanded-data HPI.  The relevant calculation was the proportional change between the 2016Q3 and 2017Q3 index values.  The increase in the index over that interval was:
(232.49844929 - 217.60366233)/217.60366233 

The increase for 2018 was based upon the change in data for home prices documented in the 3rd Quarter of 2016 and the 3rd Quarter of 2017.  That increase was 6.845% +/-.

As a result, the Maximum Conforming Loan Limit will increase from $424,100 to $453,100.

This change will allow homebuyers to finance a home in 2018 up to $453,100 in "General Areas" and still maintain a Conforming Loan status, obtain the best rates offered (and available) to them, and not be classified as a JUMBO Loan Type where qualification becomes a bit more stringent.  

So, all the above info and background lead to this announcement from the FHFA on November 28th, 2017:

     "The Federal Housing Finance Agency (FHFA) announced 11/18/2017, the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac.  In most of the U.S., the 2018 maximum conforming limit for one-unit properties will be $453,100, an increase from $424,100 in 2017".  

It makes sense that if statistics and data from the HPI (Home Price Index) support it, that the Loan Limits should be increased.  Home Prices have been on the rise, at least on average, and as the Index bears out ...

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