Higher conforming loan limits boost activity for mortgage lenders
Higher conforming loan limits boost activity for mortgage lenders
In November, Fannie Mae and Freddie Mac increased their conforming mortgage loan limits for loans originating in 2025. A loan limit is the maximum size of a mortgage that the Government-Sponsored Entities (GSEs, Fannie and Freddie) will be allowed to purchase or guarantee, per new regulations from the Federal Housing Finance Administration (FHFA).
During the past nine years, the loan limit for Fannie- and Freddie-backed mortgages has risen by $389,500. For nearly ten years (2006-2016), the single-family conforming mortgage loan limit was $417,000, and since 2017, that figure has nearly doubled. Increasing loan limits is good news for loan officers: they can offer prospective borrowers larger loan amounts with more options. Conforming loans require fewer reserves (liquid assets) and allow for higher debt-to-income ratios than a jumbo or non-conforming loan. A key challenge for lenders is qualifying borrowers for these higher loan amounts, as income and salary increases have not kept pace with inflation.
The consensus we’re hearing from the mortgage lending community is that the 2025 increase of $39,950 does not substantially move the needle like the increases in 2022 and 2023. The loan limit increase in 2022 was almost $100,000, while the 2023 increase was nearly $75,000. In 2024, the increase was $40,350.
Elevated interest rates and high inflation levels are resulting in higher debt-to-income ratios on mortgage loan applications. Many Americans find themselves in what the industry refers to as the “golden handcuffs”; many borrowers want to purchase a new home, but they do not want to part with the low interest rate and payments they acquired during 2020-2021, when rates hit record lows of around 2.5% on a 30-year fixed-rate mortgage.
The new higher conforming loan limits will likely take market share away from non-agency products including non-conforming and jumbo loans. The good news for loan officers and borrowers is that the underwriting guidelines are less stringent for conforming loans. Conforming loan underwriting allows for:
Lenders can implement 2025 loan limit changes into their pricing strategies right away
Lenders across the country raced to implement the loan limit changes into their pricing strategies as soon as the announcement was released. This allows lenders to lock in more volume in 2024, despite not being able to deliver until 2025.
However, since the Federal Housing Administration (FHA) has lower loan limits and implements loan limit changes later in the cycle, FHA borrowers will have to wait until 2025 to take advantage of the increased conforming loan limits. The FHA loan limit will increase to $524,225 for a one-unit property in 2025.
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GSE’s loan limit increase impacts the secondary market
With jumbo liquidity being a challenge in 2024, even the slightest increase can help more mortgage borrowers access credit for larger loan amounts. Typically, jumbo underwriting requirements are stricter than those for conforming loans. Some jumbo mortgage lenders will cap their maximum loan-to-value ratio (LTV) at 70%. Non-conforming jumbo underwriting guidelines often restrict their minimum FICO? Score to 680 or higher, while conforming loan requirements can utilize credit score minimums as low as 620. These more stringent requirements can make it difficult for first-time homebuyers to qualify for a jumbo loan.
The latest conforming increase will allow some borrowers who would otherwise struggle to meet jumbo guidelines to now qualify under conforming programs. The base loan limit will increase to $806,500 in 2025, with the limit in high-cost areas increasing to $1,209,750. States such as California and New York will continue to embrace these higher mortgage loan limits as they have experienced more pronounced home price appreciation than other areas of the country.
For the secondary market, the conforming loan limit change allowed mortgage loan originators to price in the change before delivery to the GSEs. Specifically, an originator was able to price a loan that was considered high-balance under the 2024 limits as a non-high-balance loan since they will be able to hold the loan and deliver in 2025. It could also allow the lender to move the borrower into a non-high-balance product, resulting in greater savings for the borrower. ?The option to hold a loan that has already closed under the old limits, and then deliver it under the new limits in 2025, allows originators some instant execution that will help them wrap up a challenging 2024.
Taking advantage of the higher conforming loan limits and more predictive scores
Higher conforming loan limits along with the use of more predictive credit scores has the potential to increase access to credit across the mortgage lending industry. Even though mortgage originators are not expecting this change to make a significant impact on their business today, the FHFA historically has not decreased loan limits. So, with continued higher conforming loan limits and increased use of more predictive credit scores, the industry will be able to serve more borrowers and increase housing affordability in the process.
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Senior Director - FICO Scores - Client Services
2 个月Great insights Alyson!
Director of Communications @ FICO
3 个月I appreciate the insights, Alyson!
Vice President of Mortgage and Capital Markets at FICO
3 个月Great info, thanks so much Alyson!!!