2018 Conventional Loan Limits

Conventional Loan Limits

Every year the new conventional loan limits are announced. Some years the amounts increase while other years they decrease. For 2018 the conventional loan amounts are increasing, much the same way they did for the year 2017.

Past Performances

The new conforming amount of conventional loans will be $453,100 which is higher than last year’s $424,100. This marks only the 2nd increase over the last 10 years. The mortgage crisis that happened from 2006 to 2009 had a long-term impact on the overall lending environment.

Thankfully, home prices have steadily increased. Since the middle of 2014, the average price of a home across the country has been on a steady increase. In fact, the average price from 2016 to 2017 jumped by over 6%. This is due to a healthy demand for homes along with a lower than average supply.

The conforming limit represents the largest loan amount a borrower can receive from either Fannie Mae or Freddie Mac. A loan above this size is considered a Jumbo mortgage and carries a slightly higher interest rate.

Increases in High-Cost Areas

The increase in the base maximum amount of conventional loan is also a good sign for potential buyers in high-cost areas.

The new maximum loan limit in the higher priced area will now be $679,650. The high-cost areas are located mainly in California, Hawaii, Alaska, and New York. There are also a few pockets located around Washington DC and within Colorado.

This is excellent news for people living in the higher priced areas. Borrowers that can afford a 10% or even 20% down payment can legitimately look at homes priced between $747,000 and $815,000 and used conventional financing for these homes.

Higher Conventional Loan Limits Make More Homes Available

The increased conforming limits make more homes available to more borrowers. Before this recent increase, a home priced above $424,100 could be considered a jumbo loan. A jumbo loan typically requires a 10-20% or more down payment along with tighter lending rules and a slightly higher mortgage rate.

Now, a borrower that qualifies for conventional financing can buy a home priced at $453,100 with only a 3-5% down payment and a better interest rate. This essentially opens up more homes to more potential buyers.

Number of Refinances Will Likely Increase

People that previously purchased with a jumbo home loan may also benefit with the new limits. If their loan balance is under the new limit, or they have the funds to pay the loan down under the limit, many people may consider refinancing in order to take advantage of a better conventional rate.

This is especially true in the higher cost areas. Now that the high cost conforming limit has increased by more than $43,000 from the previous limit, more people will be able to qualify for a conventional loan rate on their existing loans.

Consider this: a 1% reduction in rate on a loan balance of $670,000 would save approximately $6,700 per year. A 0.5% reduction in rate would save $3,350 per year. It would not take many years to save a lot of money on a refinance.

Reasons to Consider Conventional Loan

The increase in the maximum loan amount adds another reason for people to consider buying a home or refinancing an existing mortgage with a conventional loan.

First of all, the mortgage insurance is cheaper. If a homeowner finances more than 80% of the home’s value, they will be required to pay mortgage insurance. This is true for a conventional loan as well as an FHA or VA loan. However, with the FHA and VA loans, there is an additional up-front mortgage insurance premium. The up-front charge is not part of conventional loans.

Secondly, the monthly rates for mortgage insurance are often cheaper for conventional loans versus the other aforementioned loans. Combined with the absence of the upfront premium, the overall mortgage insurance for a conventional loan will be significantly cheaper.

Third, the interest rates for a conventional loan are often the cheapest rates. It may not be significantly smaller than other types of home loans, but any reduction in rate can help.

Fourth, the conventional loans do not have restrictions that are common for other loans. For instance, a VA home loan is a great program for first time home buyers, but it is only available to qualified veterans or active duty military. Another government-backed loan, the USDA loan, is only available in rural designated areas. Also, the USDA loan is only available to people with moderate income levels.

Conventional Loans Best for High Credit Scores

In light of the advantages mentioned for a conventional loan, there is one major point that needs to be addressed. The people that will experience the most benefit from a conventional loan are borrowers who have high credit scores.

While it is possible for people with slightly above average credit scores to qualify for a conventional loan, the mortgage insurance rates charged for these credit scores are often much more expensive compared to rates for people with high credit scores.

The new increased conventional loan limits are simply a reflection of the prevailing market conditions. Overall home prices have been rising steadily, not suddenly, for the last few years. Along with the increase in prices, the steady demand for homes and corresponding mortgages have fueled the need for this increase.

Borrowers with the highest credit scores may now be able to get a more expensive home with a great rate compared to last year.

2018 Conventional Loan Limits – Fannie Mae and Freddie Mac

General Loan Limits:

Units General Loan Limits
Contiguous States,
District of Columbia, and 
Puerto Rico
Alaska, Guam, Hawaii,
and U.S. Virgin Islands
One $453,100 $679,650
Two $580,150 $870,225
Three $701,250 $1,051,875
Four $871,450 $1,307,175

High Cost Area Loan Limits:

Units High-Cost Area Loan Limits
Contiguous States,
District of Columbia, and 
Puerto Rico
Alaska, Guam, Hawaii,
and U.S. Virgin Islands
One $679,650 $1,019,475
Two $870,225 $1,305,325
Three $1,051,875 $1,577,800
Four $1,307,175 $1,960,750
* A number of states and Puerto Rico do not have any high-cost areas in 2018.

 

2018 Loan limits for all states

Read the entire announcement

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