Increased Loan Limits for 2020! But What Does It Mean??

Did you know that conventional loan limits have been increased in 2020!?!? Of course you did. Everyone...Literally... EVERYONE in the mortgage and real estate industries posted about it in the typical "I want to be first to share!" fashion.

What I didn't see, anywhere, was an explanation of what in the hell it means that "conventional loan limits have increased". And that's unfortunate, because it's an all too frequent example of our industry talking in a way that only others in our industry will comprehend what's being said, on a topic that everyone in our industry already knows and understands. To summarize, I quote Dwayne "the Rock" Johnson when I say, you let the world know loan limits increased? IT DOESN'T MATTER THAT YOU TOLD EVERYONE LOAN LIMITS INCREASED!

What does matter is what increased loan limits mean for the people that can benefit from these changes - home buyers, home owners, and the real estate agents representing them.

So what does it mean?

The overall impact of the changes to loan limits really depends on your county and what type of loan you're looking for. The biggest impact will be for buyers that were using conventional financing (most often the best option for borrowers with 3% or more down payment and excellent credit), buying in the higher end of their respective real estate market. Going beyond the conventional loan limit falls into 2 categories:

• High balance conventional loans
• Jumbo loans

If a buyer exceeds the standard conventional loan limit (which upon this announcement, increased from $484,350 to $510,400), and they're buying in what Fannie Mae has determined is a "High cost" area, they're able to still obtain conventional financing - this means the same guidelines and the same underwriting standards as lower loan amounts (in high cost areas, the loan limit has increased from $726,525 to $765,600). What could change is loan pricing - some lending programs have penalties to pricing for high balance loans (a higher loan amount = more risk to lenders). While rates can be higher, the basic qualifications are mostly the same under the "conventional loan" umbrella.

Where things become a little more complicated (and where this change can really benefit a buyer) is when loans exceed conventional loan limits and land in "Jumbo loan" territory. Unlike conventional loans, Jumbo loans are offered by many different investors with vastly different rates and sets of qualifying guidelines. Even with the same investor, rates and programs can vary by a ton in the Jumbo world. Jumbo loans also tend to have EITHER stricter requirements (6 or more months worth of mortgage payments required in savings after all costs of the loan/home purchase are considered, FICO scores of 700 or higher, etc), OR they come with much higher rates (if a conventional rate starts with the number '3', it's not out of the ordinary for some jumbo products to start with a '5', especially with lower down payment products).

For this reason, if buyers looking at homes just barely fall into Jumbo territory, they could stand to gain an entirely different loan, and potentially qualify for a higher priced home, once these changes to loan limits take place. For those that were barely into the realm of "high balance conventional" loans, you may now fall into standard conventional loans, potentially benefiting from improved rates (this is especially true for cash out refinance loans, where home owners are charged a FULL POINT, or 1% of the loan amount - expensive on higher loan amounts! - JUST for being in 'high balance' territory VS standard conventional loan territory.

Some Real Life Scenarios

Here are a few scenarios where increased loan limits could benefit home buyers and home owners:

• Aforementioned, homeowners looking to take cash out on their homes may be able to get more cash at a better rate if the changes move them from jumbo or high balance into standard conventional loan territory
• The home buyer who makes good money but is in a high priced market where a large % down payment is difficult to come by - perhaps they have their down payment and qualify in every way, but for the Jumbo loan they need, the investor requires 6-12 months reserves that the buyer just doesn't have and can't easily save. If these changes allow them to get a home based on a high balance conventional loan, they may no longer need ANY reserves or savings beyond what's required for their purchase
• The buyer in the higher end of their market that doesn't have the credit required by many jumbo investors (or at least not at even remotely attractive rates/terms) - with these increases, the buyer could potentially get a nicer home with a more attractive loan product, even if their credit is less than perfect.

There are a ton of situations where higher loan limits can offer a benefit to borrowers, and the above are just a few. It's important to also keep in mind the following:

• Loan limits vary by county. Only certain counties are able to offer "high balance conventional" loans, so while the $510,400 loan amount applies to everyone, certain counties can go higher, up to $765,600. To learn what YOUR county limit is, reach out to your favorite lender (ahem...I make a really good favorite lender!)
• This is for conventional loans only - FHA loan limits are often quite different and vary even more by county (again, happy to inform you about your county, just ask!)
• While these loan limits don't take place until 2020, applications can be taken TODAY using these new amounts. Your loan just cannot fund until the new year, so any closings scheduled on or after 1/1/20 can take advantage of these changes today.

These changes are important, because conventional loans are one of the best loan products out there (I'd argue, second to only VA loans for veterans), and in many areas that are experiencing rising prices due to low inventory, these changes should allow access to more people to buy homes. While the changes certainly don't address the issue of costs drastically increasing over the past couple years, they do alleviate some of the resulting pain and will allow borrowers access to low-interest financing to buy a home and begin building wealth through real estate.

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