Question: Mortgage loan limits have increased for 2018. What does that really mean for the real estate market?
Answer: There was a time when new mortgage loan limits – the maximum amount that could be borrowed with FHA and conforming loan programs – was a very big deal. The news for 2018 is that loan limits have increased substantially but in an odd way not everyone will benefit.
Let’s start with the increases.
FHA Loan Limits
For the FHA program, the maximum loan size for a single-family home in most areas will be $294,515, up from $275,665 in 2017.
In “high-cost” areas, we go from $636,150 in 2017 to $679,650. In Alaska, Hawaii, Guam & Virgin Islands, the basic FHA loan limit has soared from $721,050 to $1,019,475.
The reverse mortgage ceiling jumps from $636,150 to $679,650, matching high-end FHA limits.
These are big increases and they are important. Higher FHA loan limits allow borrowers to purchase with as little as 3.5 percent down and a 580 credit score.
In areas with rising home prices, higher FHA loan limits mean that borrowers with little down are not excluded from the market, especially first-time purchasers. Of the 882,000 purchase mortgages backed by the FHA in fiscal 2017, 725,000 (82 percent) went to first-time buyers.
The average FHA credit score in fiscal 2017, the period that ended September 30th, is 676. That’s generally seen as a “good” score according to MyFico.com, but just barely. Scores between 580 and 669 are regarded as merely “fair.”
VA Loan Limits
The VA loan program does not have official loan limits. As the government explains:
“VA does not set a cap on how much you can borrow to finance your home. However, there are limits on the amount of liability VA can assume, which usually affects the amount of money an institution will lend you. The loan limits are the amount a qualified Veteran with full entitlement may be able to borrow without making a down payment.”
What really happens with VA loans is that the government guarantees mortgage financing for qualified individuals. Lenders take the guarantee amount, multiply by four, and that’s typically how much they will lend. They can lend more in theory but in practice don’t.
To learn more about VA loans, click here.
Conforming mortgages are generally defined as the loans Fannie Mae and Freddie Mac will buy in the secondary market from local and online lenders. The loans must meet certain standards and thus “conform” to Fannie Mae and Freddie Mac requirements.
For 2018, the basic loan limit for a single-family house in most areas is $453,100. That’s a huge jump from the 2017 limit of $424,100. For high-cost areas the new single-family limit is $679,650. This too is a big jump from 2017 when the high-cost limit was $636,150.
Jumbo Mortgages & Loan Limits
In the past, an increase in the conforming loan limits would have been seen as a big and important development. The reason is that loan amounts above the limits meant borrowers would need a “jumbo” mortgage.
Jumbo loans were unattractive because they typically had a higher cost; however, that is no longer true. For example, the Mortgage Bankers Association reported that in mid-December 30-year conforming loans were priced at 4.2 percent while jumbos were at 4.11 percent.
Why do jumbos have lower rates?
When mortgages are sold by lenders to Fannie Mae and Freddie Mac, there are certain charges involved called “g-fees.” G-fees are a cost which lenders pass through to borrowers.
Because Fannie Mae and Freddie Mac don’t buy super-sized mortgages, pricing for jumbo loans does not reflect a g-fee cost. Add in a little free-market competition and the interest rates for jumbo financing is actually lower than conforming mortgages.
Because conforming loan limits are higher, the result is that you have to borrow more to get jumbo mortgages. What used to be good for all borrowers – higher loan limits – is now not so good for buyers looking for big mortgages. Weird, but true.