Move-up Home Builders Just Got a Nice Present From the Government

The big role that government policy can play in the housing market is often undersold. Most homebuyers think of a mortgage transaction as something between them and the bank. In reality, there are background players that play a critical role, particularly the government. A government guarantee can be a critical factor in determining whether they even get a loan and how much it will cost. Government guarantees, in particular, are generally great things for borrowers, but they also are good things for the housing industry in general, particularly homebuilders like PulteGroup (NYSE: PHM).

The Federal Housing Finance Agency (FHFA) recently increased the conforming loan limits on a home loan up to $510,400 (from $484,350 a year ago), effective in 2020. The conforming loan limit sets the ceiling for loans that can be purchased by the government-sponsored entities (GSEs) of Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC). Government-backed loans (aka conforming loans) are guaranteed by the government, which offers advantages to both the borrower and the lender.

The increase in loan limits makes it easier for borrowers to afford properties in two ways. First, conforming loans allow a lower down payment than non-conforming loans (typically jumbo loans, which are larger than the conforming limit). Fannie Mae has a program called HomeReady which permits down payments as low as 3% will permit down payments that low. Second, conforming programs permit lower credit scores from potential borrowers than most jumbo lenders are willing to allow. Simply put, it is easier to get into a home with a conforming loan than it is without.

Source Fool.com