With house prices soaring, government could support home loans of nearly $ 1 million

Fannie Mae and Freddie Mac are government sponsored entities (GSEs). They play a very important role in the housing market. They buy mortgages from private lenders and sell them to investors. These loans are resold on the secondary market.

Since lenders take less risk when loans can be resold to Fannie Mae and Freddie Mac, lenders are more willing to give loans to borrowers even if the future homeowners don’t have perfect credentials. The loans they offer can also be made at a lower interest rate.

A loan of almost $ 1 million can be classified as a compliant loan

The Freddie and Fannie Loan Buyout is intended to help make housing more accessible and affordable for average Americans. As a result, there are limits on the size of the loans that these GSEs will guarantee. Loans that fall below these limits may be classified as “compliant”, while loans that exceed them are non-compliant. Non-conforming loans are generally less available, more difficult to obtain, and more expensive.

Next year, however, the compliant limits could increase significantly, and in some cases Fannie and Freddie could actually back loans valued at close to $ 1 million.

Here’s why.

Fannie and Freddie’s loan limits set to increase significantly

In 2021, the maximum loan limit for a compliant loan guaranteed by Fannie Mae and Freddie Mac is $ 548,250 in the majority of places in the United States. However, in some expensive housing markets, including parts of New York and California, the limit is already much higher. In 2021, it’s $ 822,375.

In accordance with the law, the maximum loan limits for a compliant loan are updated every year. A specific formula is used to set the new loan limits, which takes into account average increases in house prices across the country. Since house prices have skyrocketed in many places, the upshot is that Fannie and Freddie’s loan limits are set to increase significantly next year.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has yet to officially announce what the new compliant loan limits will be. However, recent data from the FHFA’s Home Price Index revealed an 18.5% increase in prices from the previous year.

Using this measure, this means that the new limit in most of the United States would be $ 650,000. And in parts of the country where house prices are high, it would climb to $ 975,000. Some lenders have already started adjusting their loan offerings based on these numbers, and the official announcement is expected to take place in late November.

While this is good news for people who live in high cost areas and will now be eligible for a lower rate home loan if they can qualify for a compliant loan, it also raises questions as to whether the government should help people buy homes valued at nearly $ 1 million. Obviously, only wealthy Americans could afford property at this price.

The FHFA has the discretion to deviate from the standard formula used to increase loan limits, and it is possible that it will do so if the administration does not believe it is fair to ask taxpayers to support these. high cost homes.


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