Fannie Mae Loan Limits
Every year, lenders must adhere to Fannie Mae loan limits that center around the average cost of homes within a given area. The housing market does not stay stagnant. Home prices can increase or decrease from one year to the next. Therefore, mortgage insurers such as Fannie Mae (FNMA) must stay up to date on these changes. By doing so, government-sponsored enterprise (GSE) can adjust its loan limits based on the housing price index for a given area.
Conventional loan limits are not the same nationwide. They vary from one area to the next, as some locations have higher housing costs than others. Alaska, for instance, tends to have higher home costs than other areas within the United States. Limits also vary depending on the size of the property and other factors. Review the sections below for details on loan limits.
What are Fannie Mae loan limits?
Fannie Mae loan limits represent the maximum amount that a lender working with the company can offer a home buyer. The Housing and Economic Recovery Act (HERA) requires that Fannie Mae set new loan limits annually based on the housing price index from one year to the next. Thus, Fannie Mae loan limits in 2018 are different from the ones from 2019.
The purpose of loan limits is to offer homebuyers financial options that match the housing market and their local rea. With this in mind, loan limits vary based on the area and the amount of units in the property. While many areas around the nation will have the same loan limits, some high-cost areas tend to have higher limit. Hawaii, Alaska, Guam and the U.S. Virgin Islands also have different loan limits.
It is important to note that conventional loan limits do not only apply to FNMA loans. There are also Federal Housing Administration (FHA) limits and Department of Veterans Affairs (VA) loan limits. These federal departments offer housing programs to specific populations and must also adhere to HERA laws.
Fannie Mae loan limits attempt to match changes in home prices in local areas. Home prices nationwide have steadily increased over the past few years, due to a lack of inventory. Therefore, many homebuyers find themselves unable to afford current home prices and must purchase loans. By having loan limits that are proportionate to the average cost of homes in the area, homebuyers have better opportunities to purchase the home they want.
How does Fannie Mae set conventional loan limits?
The HERA imposes guidelines on how to calculate Fannie Mae conforming loan limits for each year. Prior to 2015, mortgage insurers did not have to use expanded data in their calculations. However, the new method of calculating FNMA mortgage limits uses a housing price index (HPI) that is adjusted seasonally and includes the expanded data. From there, the company will determine the proportional changes in the HPI. Depending on the year’s average cost of homes, the loan limit from one year to the next can increase or decrease. The loan limits are listed for one-unit properties up to four units.
High-cost locations have higher Fannie Mae mortgage loan limits to ensure they are proportional to home prices in the area. A high-cost area is typically one where the median home value surpasses the baseline loan limit by 115 percent. Thus, loan limits in this area can be up to a certain percentage of the baseline limit. However, they cannot go beyond this percentage, as that would then become what is known as a jumbo loan.
Note: For more information on how Fannie Mae calculates loan limits, download our in-depth guide.
Moreover, the FHA conducts annual median home valuations nationwide to determine conventional loan limits. However, if lenders find supplemental data that can greatly affect the current loan limits, they have up to 30 days to submit it. The FHA will then review the appeal request and respond by changing the published loan limits for that area or rejecting the appeal.
What are the Fannie Mae loan limits in 2018?
As stated previously, the Fannie Mae conforming loan limits in 2018 depend on unit size. For single-unit properties, the loan limits range from $453,000 to $1,019,000. This includes limits in high-cost areas and areas with special limits like Alaska, Guam, the U.S. Virgin Islands and Hawaii. Properties with two to four units have loan limits that range from $580,000 to $1,900,000.
For specific Fannie Mae loan limits, download our comprehensive guide.
What should you do if you need a loan higher than the Fannie Mae loan limit?
Fannie Mae loan limits allow homebuyers to adequately plan for a home purchase. Based on their own budgets, they can determine what home falls within their price range. Homeowners should not only consider the down payment but also the loan amount. In some cases, homeowners find a house that meets their needs but is above the loan limit for the area. This is where jumbo loans can be used as an alternative. These loans are those that are above the limit set by Fannie Mae. To qualify, applicants must typically earn a high income and have a high credit score. These types of loans tend to have higher interest rates, down payment requirements and closing costs. Thus, they are less popular and have stricter eligibility requirements.
Borrowers looking to purchase a mortgage loan above the Fannie Mae loan limits for the area could obtain two mortgages at once. Colloquially known as a piggy-back loan, the term refers to the process of obtaining two mortgage loans on the same property simultaneously. When homebuyers take out both loans, they generally use the 80/10/10 rule. The method works as follows:
- 80 percent of the cost of the home will be on the first mortgage loan.
- 10 percent will go on the second loan.
- The remaining 10 percent will be the down payment.
This strategy allows homebuyers to stay within the Fannie Mae loan limits for the property. While some homebuyers do not follow the percentages exactly, they may use a variation of the method.