The Federal Housing Finance Agency (FHFA) has announced that conforming loan limits would increase for 2021. As with any announcement of this type, it is filled with industry jargon that may make it difficult to understand what this means. At On Q Financial, LLC, 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 us explain 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?
The FHFA sets these limits because it is a risk to secure higher value mortgages. Fannie Mae and Freddie Mac are responsible for backing the loans they purchase should they default. If they were to acquire too many loans at a high value, it could pose a risk to the agency’s financial future. The limits also protect lenders since they will be less likely to approve a risky high-value loan if it exceeds the limits.
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, the FHFA 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. Conforming loan limits for these areas are determined as a function of the medium home price.
Are Conforming Loan Limits a Big Deal?
It is a big deal when new conforming loan limits are announced as it allows for more conventional loans to be funded by lenders without using a jumbo loan.
HERA
After the 2008 housing crisis, the federal government enacted the Housing Economic Recovery Act, which, among other things, established rules for conforming loan limits. The intention was to protect borrowers and lenders alike to prevent another crash. As previously mentioned, the limits help ensure Fannie Mae and Freddie Mac remain financially solvent, thereby protecting lenders and borrowers.
Fannie and Freddie
Fannie Mae and Freddie Mac are currently in conservatorship, meaning the regulatory agency, FHFA, is in charge of ensuring their financial stability. The ultimate goal is to return the agencies to the private sector without the need for government regulation. However, until then, the FHFA is in charge of establishing rules that protect the agencies and the industry.
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 be increased by that same amount starting on January 1, 2021.
Baseline Loan Limit
For the majority of 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.
High-Cost Areas
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.
Conventional Loan vs. Jumbo Loan
You may be wondering why it matters that you can get a larger conventional loan. It is a good question, and to answer it, we will look at the differences between a conventional loan and a jumbo loan.
Conventional
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!
Jumbo
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 personal 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 either of these loan types is right for you, contact a mortgage consultant to get personalized advice!
How this Helps You!
Increasing the conforming loan limit means that you may be able to use a conventional loan to purchase a higher-priced property. Where before you may have been limited into a jumbo loan, you would now have the options and flexibility that conventional loans offer on loans up to $548,250! It also means that getting approved for a larger loan may be more manageable.
If you have been considering a home purchase but were unsure about the rising cost of homes, now may be the time to consider. At On Q Financial, LLC, 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.
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*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.On Q Financial, LLC1130200681Y00000B0LpS