Mortgage borrowers will soon get a lot more leeway when it comes to taking out a home loan: The Federal Housing Finance Agency (FHFA) recently announced that it will be increasing the limit on conforming loans -- those that adhere to the standards imposed by Fannie Mae and Freddie Mac, the government-sponsored entities that buy conforming loans. In most of the country, the maximum conforming loan limit for one-unit properties will be $510,400 in 2020, an increase from 2019's $484,350 limit. And in high-cost areas of the U.S., the maximum conforming loan limit will be $765,600. That gives homebuyers a higher cap before jumping into jumbo loan territory -- but it also opens the door to higher mortgage loan balances across the board, and that frankly, is a mixed bag.
Why the change?
Conforming loan limits are adjusted to account for changes in home prices nationwide. FHFA data showed that home prices increased by 5.38%, on average, between the third quarter of 2018 and the third quarter of 2019. As such, conforming loan limits are following suit for the fourth year in a row.
Conforming loans versus jumbo loans
To be clear, borrowers aren’t limited to conforming loans; those who need to borrow more can seek out jumbo loans. But there are a number of benefits that conventional loans offer over jumbo loans.
First, conforming loans are generally easier to qualify for. Even borrowers with mediocre credit can qualify for a conforming mortgage, albeit at a less competitive rate. But lenders are generally more hesitant to give out jumbo loans since there's a higher level of risk involved, which often leaves borrowers with lower credit scores out in the cold (though that's not necessarily a bad thing; more on that below). Conforming mortgages typically offer lower interest rates than jumbo loans, too, making them more affordable.