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December 2016

Conforming loan limits to rise for first time since 2006

Next year's loan limits backed by Fannie Mae and Freddie Mac will rise for the first time since the housing crisis, a move that will likely make it much easier and cheaper for some first-time homebuyers to enter the market.

The Federal Housing Finance Agency (FHFA) announced the increase in maximum conforming loan limits in late November following news that home prices in the third quarter eclipsed the level of a decade ago.

For most of the U.S., the limit on a single family homes rises from $417,000 to $424,100.  For areas with the most expensive homes, the ceiling becomes $636,150 (150% of $424,100), up from $625,500. (Editor's note: The FHFA can set loan limits for individual counties in between the lower and upper thresholds depending on their cost. See the chart at the bottom of this article for limits within Washington state.)

In announcing the bump-up, FHFA acknowledged the threshold is important to homebuyers and the real estate industry. Jumbo mortgages sometimes have higher rates than loans that qualify for government backing. Additionally, these mortgages often carry steeper requirements from lenders, such as higher credit scores or down payments of 15 to 20 percent, the agency noted.

Conforming loan limits for Fannie and Freddie are determined by the Housing and Economic Recovery Act of 2008. That measure established the $417,000 baseline limit. It also mandated that, after a period of price declines, that limit could not rise again until home prices returned to pre-decline levels, which was pegged to be the third quarter of 2007.

The average U.S. home price remained below the pre-decline level until the latest quarter when FHFA's Home Price Index made it "clear" that average home prices surpassed the level for 2007's third quarter.

The adjustment in confirming loan limits is a long time coming, according to William E. Brown, the 2017 president of the National Association of REALTORS®.

"Today's conforming loan limit increase is a much needed recognition of rising home prices in high-cost markets, and a help to first-time and lower-income borrowers looking to utilize an FHA mortgage," said Brown, a second-generation Realtor. Noting credit remains tight, he said this decision "will help more qualified buyers address the hurdles and high costs standing between them and the dream of homeownership."

Phil Ganz, a Boston-based loan officer with Fairway Mortgage, said many first-time buyers are shut out of the market because the houses they want to buy are too expensive to qualify for government-backed mortgages.

Many potential homebuyers have decent incomes but can't come up with more than 3 percent for a down payment, Ganz reported. "When you raise the limits, it's about giving young, successful people the chance to get in the game," he added.

Ken Fears, NAR's director of housing finance and regional economics believes the new limits indicate health is finally returning to the market. He also believes they reflect "an opportunity for a true expansion of credit." 

The FHFA's announcement should lead a government loan program with even looser borrower requirements to raise its own loan limits, according to Fears. The Federal Housing Administration typically sets its own loan limit at 65 percent of the Fannie Mae-Freddie Mac limit, he explained. That would mean a rise to $275,665 from $271,050 for FHA mortgages, which some buyers with a credit score of 580 could obtain with down payments as low as 3.5 percent.

Some industry-watchers suggest the increase could bring a negative reaction from some Republicans who say the government should have a smaller footprint in the mortgage market. (About 72 percent of new mortgages are backed by the government according to Inside Mortgage Finance, a trade publication.)  Guy Cecala, that magazine's publisher downplayed the possible pushback. "Given that this isn't a huge increase, I don't think there will be a big hue and cry about the government increase their share," he stated.

Fannie Mae and Freddie Mac Maximum Loan Limits for Mortgages in Washington State

(Acquired in Calendar Year 2017 and Originated after 10/1/2011 or before 7/1/2007)
(limits were determined under the provisions of the Housing and Economic Recovery Act of 2008)

One-unit limit
Two-unit limit
Three-unit limit
Four-unit limit
King, Pierce, Snohomish
All other counties in Washington