Increase In The Conforming Loan Limits and What It Means For Buyers
In November 2020, the Federal Housing Finance Agency (FHFA) came out with its 2021 mortgage loan limits. The FHFA is the independent regulatory agency that supervises and oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. What does this mean for you? Well, if you’re in the market for a new home, it can mean a lot.
The FHFA adjusts the cap on conforming loans every year. A cap is the limit you can borrow for a home and still have it backed by Fannie Mae and Freddie Mac. In most of the United States in 2020 that number was $510,400. In regions of the country where housing is most expensive (ie. New York, California) that number has been $765,000 since 2000.
For 2021, the FHFA increased the cap to $548,250 or 7.4% and $822,375. The FHFA adjusted the caps to reflect the growth in real estate prices throughout the country. In October 2020, existing home sale prices were up 15.5% from that time last year according to the National Association of Realtors. (Realtor.com)
What is the Difference Between a Conforming Loan and a Jumbo Loan?
A conforming loan is one that falls within the guidelines set by Fannie Mae and Freddie Mac. To obtain a conforming loan, you must meet certain criteria and be approved for a home loan that does not exceed Fannie Mae and Freddie Mac’s mortgage loan limits. Generally speaking qualifications for a conforming loan include:
- A credit score of at least 620 to 700 (depending on how much you put down and what kind of loan you’re getting)
- A debt-to-income ratio no higher than 36% to 45%
- A minimum 3% down payment
- Certain loans have minimum reserves
Private mortgage insurance will probably be required if you make less than a 20% down payment. Lenders may have additional requirements. Fannie Mae and Freddie Mac allow them leeway in their decision-making process.
A conforming loan is not the same as a conventional loan. Conventional loans are any loans made by a private lender, as opposed to a government agency like the FHA, USDA, or VA. The size of the loan doesn’t matter. All conforming loans are conventional, but not all conventional loans are conforming. Lenders like conforming loans because they can be bundled and sold in the secondary mortgage market.
Conforming loans are intended primarily for the average homebuyer. Jumbo loans are typically made to buyers who are looking for more expensive homes. The loan amounts are above the limits set by the FHFA and aren’t backed by Fannie Mae, Freddie Mac, or any government agency. Because of this financial institutions consider them higher risk.
Lenders tend to be very selective about who is approved for these loans. To qualify for a jumbo loan, you need at minimum:
- A large down payment (20% usually)
- An excellent credit score (at least 700)
- A low debt-to-income ratio (less than 36%)
- A stable, high income
- Cash reserves (Six to twelve months of monthly payments)
Because of the risk, jumbo loans tend to carry higher interest rates than conforming loans. That isn’t always the case, however. Buyers with very high incomes may get lower rates if they convince lenders of their financial ability to repay the debt.
What Does Increasing the Conforming Loan Limit Mean for You?
It means you may be able to buy more house than you thought possible and still fall within the Fannie Mae and Freddie Mac guidelines. You may be able to buy in a better school district or in a neighborhood that was beyond your reach before.
It is much easier to get approved for a conforming loan than it is for a jumbo loan. For one thing, financial institutions will be more comfortable loaning you the money you need. You don’t need as much money down and can qualify with a lower credit score and a higher debt-to-income ratio. You may even get a lower interest rate than you would with a jumbo loan.
If you currently have a jumbo loan it might be easier to refinance it into a conforming loan with the higher FHFA limit. The potential savings could be significant enough to go through the hassle.
What Loan Program is Right For You?
Ultimately the type of loan you get will depend on your goals and financial circumstances. You should work with your lender and Realtor to determine which of the six basic loan programs will work best for you.
1 Jumbo Loans – These are for borrowers with the financial ability to purchase a home above the loan limits set by the FHFA.
2 Conventional Loans – These loans meet the requirements set by Fannie Mae and Freddie Mac. They are a great option for many homebuyers and account for about two-thirds of mortgages.
3 FHA Loans – These loans are intended for moderate to low income homebuyers with lower credit ratings.
4 VA Loans – These are low interest rate mortgages offered to service members and qualifying family members.
5 USDA Loans – These are mortgages backed by the Department of Agriculture and offered to homebuyers in mostly rural areas.
6 Construction Loans – These are loans for buyers building new homes.