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What are backstop mortgages and what benefits can they provide to the customer?

After mortgage rates soared during 2022, the FHFA has upped next year’s threshold for conforming mortgages.

Will this be a good year to buy a home?

Most mortgages taken out in the United States are known as conforming loans and they are typically the most beneficial for both lenders and buyers. Conforming loans are mortgages that qualify to be underwritten by Fannie Mae and Freddie Mac, which means that can more easily be sold to investors.

These financial products are also known as ‘backstop mortgages’ because Fannie Mae and Freddie Mac offer a guarantee on the mortgage. Those which do not comply with the terms set out for conforming loans have much more onerous underwriting requirements and work out more expensive for the buyer.

Housing Agency ups the threshold for backstop mortgages

The federal government has raised the threshold for backed mortgages in 2023 in a response to the rapid rise in house prices in recent years. The Federal Housing Finance Agency (FHFA) announced that the typical maximum value of a mortgage available for government backing will rise by 12% next year, to $726,200.

However that figure varies in certain parts of the country where typical housing prices are considerably more expensive. In some high-cost markets, backstop mortgages will be available for houses worth up to $1.089 million.

This will be the first time that homes worth in excess on $1 million will be eligible to qualify for a conforming loan. Areas covered by the boosted threshold will include New York and Los Angeles, but also some more rural high-value spots like Wyoming’s Teton County and Utah’s Wasatch County.

Since the start of 2020 the median price of a house sold in the US has jumped by 40%, fuelled in part by the record-low mortgage rates.

What are the benefits of a backstop mortgage?

A backstop mortgage is a type of conforming loan in that is adhere to the guidelines set out by the FHFA. The federal agency has close ties to Freddie Mac and Fanny Mae and the entities work together to offer better terms to customers.

Here’s some of the benefits of backstop mortgages:

- Lenders typically have lower credit score requirements

- Lower up-front payments needed for conforming loans

- Normally involve less risk being assumed by the lender

- Non-conforming loans can have very varied eligibility requirements

The FHFA’s decision to raise the threshold for backstop loans is good news for those looking to take out a mortgage because more borrowers will be able to receive a more favourable deal. However it does point to the sustained trend of rapid price rises in the US housing market.


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