New Loan Limits and What it Means for You
The Federal Housing Finance Agency (FHFA) has announced that conforming loan limits would increase for 2021. Following suit, the Federal Housing Administration (FHA) has also increased limits for 2021. As with any announcement of this type, it utilizes industry jargon that may make it difficult to understand what this means. At On Q Financial, we believe in simplicity, so we will decode this announcement and give you all the information you need to make all of your housing decisions!
What are Conforming Loan Limits?
Before we get into the announcement, let’s examine what conforming loan limits are. “Conforming” refers to a loan falling within limits set by the FHFA and, therefore, can be guaranteed by the agencies Fannie Mae and Freddie Mac.
Why are there Loan Limits on Mortgages?
Loan limits are not just for conventional mortgages. Each loan type has its own limits put in place to limit risk to the backing agency. If the FHA backs a loan that defaults, they want to make sure they can take the loss. Establishing loan limits ensures that those losses remain below a certain amount.
How are Loan Limits Decided?
Loan limit adjustments are required every year, thanks to the Housing and Economic Recovery Act of 2008. Using the annual FHFA House Pricing Index for the previous year, backing agencies can determine the average home price increase and use that same value to determine the limit increase. However, there are exceptions for Hawaii, Alaska, Guam, U.S. Virgin Islands, and high-cost areas. The FHFA determines loan limits for these areas as a function of the medium home price.
Are Conforming Loan Limits a Big Deal?
New loan limits, especially increased loan limits, are a big deal as they allow for higher-priced homes to qualify for various loans rather than being stuck with jumbo loans.
2021 Conforming Loan Limit Changes
Because home prices rose by an average of 7.42% in 2020, the FHFA announced that conforming loan limits would increase in 2021 by that same amount starting on January 1, 2021.
Baseline Loan Limit
For most counties across the country, the conforming loan limit increase is directly equal to the rise in average home price. One-unit homes will have a conforming loan limit of $548,250, which is, again, a 7.42% increase from last year.
In higher-cost areas, however, this increase is not as simple. The FHFA used a different calculation for areas where the median home price was 115% higher than the baseline loan limit. Instead, these counties received a conforming loan limit of 150% of the baseline, which amounts to $822,375.
Alaska, Guam, Hawaii, and U.S. Virgin Islands
The loan limits for Alaska, Hawaii, Guam, and the U.S. Virgin Islands must be at least 50% higher than the national baseline limit, which means that these areas also received a new limit of $822,375. The increased limit is due to their classification as “statutorily designated high-cost areas.”
Conforming Loan Limits Map
To make it easier to find the conforming loan limits for your area, the FHFA created a map of the limit differences between each county with the high-cost regions highlighted.
2021 Nationwide Forward Mortgage Limits
While Conforming Loan Limits determine which loans may be considered Conventional, the FHA uses Nationwide Forward Mortgage Limits to determine their limits. Like Conforming Loan Limits, Forward Mortgage Limits will also increase.
FHA uses 65% of the baseline conforming loan limit to determine which areas are “low cost.” However, different loan limits depend on how many units the property holds. The limits are as follows:
- One-unit: $356,362
- Two-unit: $456,275
- Three-unit: $551,500
- Four-unit: $685,400
On the other hand, high-cost areas are 150% of the conforming loan limit and break down the same way as low-cost areas.
- One-unit: $822,375
- Two-unit: $1,053,000
- Three-unit: $1,272,750
- Four-unit: $1,581,750
Alaska, Guam, Hawaii, and U.S. Virgin Islands
Like the FHFA limits, these regions have different limits than the rest of the country. The FHA calls the limits for these areas “special exceptions” and are as follows for 2021.
- One-unit: $1,233,550
- Two-unit: $1,579,500
- Three-unit: $1,909,125
- Four-unit: $2,372,625
FHA Loan Limits by County
However, FHA loan limits vary by county. To find the FHA loan limits for your county, you can use the HUD’s county lookup tool. Type in your state and county, then change the year to 2021 to get your county’s specific new limits!
You may be wondering why it matters that loan limits have increased. It is a good question, and to answer it, we will look at the differences between a couple of loan types.
Conventional loans are among the most flexible loan types, allowing for various options for down payment or loan terms. These loans are a good option for borrowers with good credit and can provide a 20% downpayment to avoid mortgage insurance. However, conventional loans can also be acquired with only 3% down with either the FNMA Home Ready or the FHLMC Home Possible program, provided at least one buyer is a first-time homebuyer or the borrowers meet area median requirements.
Because government agencies do not back these loans like USDA and VA loans, they are usually sold by the lender to a larger corporation that can bear that risk. With an increase in loan limits, though, you may now be able to secure a conventional loan up to $548,250 with only 3% down!
FHA loans are the more accessible cousin of conventional loans. The purpose is to get Americans into a home of their own by reducing the barriers that keep them from being eligible for a conventional loan. With lower income, down payment, and credit requirements, more buyers qualify for FHA loans. Keep in mind, though, that for FHA loans, mortgage insurance is required.
Jumbo loans cover most situations where the home price is over the conforming loan limit of $548,250 set by the FHFA, but lenders cannot sell these loans to Fannie and Freddie as they do not conform to the loan limits. Essentially, jumbo loans are riskier for lenders and, therefore, more challenging to acquire. Jumbo loans often come with requirements, such as stricter underwriting procedures and higher cash reserves.
Which is Better?
Which loan type is right for you depends mainly on your situation. However, conventional loans offer the most flexibility with many options and different ways to structure the loan. While not incredibly rigid, jumbo loans are more difficult to obtain due to the added risk and large amount. If you are unsure whether these loan types are right for you, contact a mortgage consultant to get personalized advice!
How this Helps You!
Increasing loan limits means that you may be able to purchase a higher-priced home with additional loan options. Where before your only option may have been a jumbo loan, you now may have the options and flexibility that other loans can offer up to $548,250 for conventional and $356,362 for FHA! It also means that getting approved for a larger loan may be more manageable.
If you have considered a home purchase but were unsure about the rising cost of homes, now may be the time! Home prices are continuing to increase, and rates are at historic lows. Be among the first to take advantage of this excellent time to buy!
At On Q Financial, we want to get you the best loan for your dream home, and part of our process is ensuring you have all of the information you need. Check out our Home Buying Journey guide. If you are still unsure about the house buying process or have questions, do not hesitate to reach out to one of our mortgage consultants.
*Information is subject to change without notice. Some restrictions may apply. Approximate loan amounts for a fixed 30 yr. Conventional loan on a purchase price of $548,250 with 20% down are shown for comparison and informational purposes only. Interest rate of 4.083%, APR of 4.67%, and down payment of $109,650. Additional estimated funds due at closing $11,300. Approximate monthly payment of $3,699. Loan scenario does not include additional costs/fees associated with monthly mortgage expenses such as HOA fee. All amounts shown are estimates and will vary for each loan. Rates and fees are subject to change at any time. This is not a commitment to lend or extend credit. Loan approval is subject to applicant’s qualification for a loan program. ONQ1217200681Y00000B1tdP
About the Author
Before opening On Q Financial in 2005, John Bergman originated and funded 450 units a year as a loan officer. He founded the company with just $1M of personal life savings—committed to his vision for building the best independent mortgage organization in the industry.View John's Profile