Conforming loan limits to increase to nearly $1 million
Here’s some great news for prospective home buyers (and existing homeowners) whose loan amounts are slightly higher than the current loan limits in 2021. Due to the recent increase in home prices, Fannie Mae and Freddie Mac, will soon provide guarantees for mortgages up to nearly $1 million.
The official announcement was made by the Federal Housing Finance Agency on Tuesday, adding that in the wake of the Coronavirus recession, the housing market has been booming with tight inventories, strong buyer demand, and record-low mortgage rates.
A report also shows that home prices rose 18.5% from a year ago, the biggest annual increase in the history of the index.
This means the baseline conforming loan limit for 2022 will be $647,200, up nearly $100,000 from last year. Areas with higher costs can now borrow up to $970,800, or 150% of the baseline loan limit. Since 1980, this is the largest dollar and percentage increase in the history of this measurement.
In other news, several mortgage lenders had already increased their maximum loan amounts ahead of this announcement.
Also read: Southern California Real Estate: Fannie Mae Conforming Loan Cap Is Set to Jump by Nearly 15% in 2022, What Does it Mean for You?
The Conforming Loan Limit
In 2022, the conforming loan limit will be increased to 150% for people who live in a high-cost area.
If you want to borrow this much money for a single-family home in Los Angeles or Washington, D.C., you could borrow up to $970,800.
On the other hand, you can get a loan limit of nearly $2 million if you’re buying or refinancing a multifamily property.
What does this mean for homebuyers?
Homebuyers can also qualify for less expensive loans with smaller down payments and lower credit scores when they get conforming loans.
Melissa Cohn, regional vice president at William Raveis Mortgage, says the increase is great news for homebuyers, especially in high-cost areas where modest homes had to get jumbo mortgages.
Due to the huge price increases, homebuyers have a hard time getting financing. For first-time homebuyers, Freddie Mac and Fannie Mae include rental payments in the mortgage credit evaluation process, which will help a lot of other buyers.
Cohn called it a big bump. “It would make conforming loans possible for a lot of people who never had access before. Many people in New York City never had the opportunity to take advantage of the benefits of conforming loans.”
Conforming loans have a lower down payment requirement, lower credit scores, and allow parents to sign and a higher debt-to-income ratio. Conforming loans are good for people who are self-employed because their income requirements are more flexible.
Those who were self-employed during the pandemic and saw their income restored in 2021 will benefit from this program particularly, Cohn commented. “If they want to buy in 2022, they can get a waiver so they only need to provide the most recent tax return” he added.
What is jumbo financing?
Jumbo loans are conforming loan limits that exceed the baseline limit set by Fannie Mae and/or Freddie Mac. Borrowers must have a very good credit score to get jumbo mortgages. And because lenders see borrowers as riskier, these loans usually require larger down payments (20% or more) and often carry a higher interest rate than conventional loans.
How to qualify for a jumbo loan?
Lenders use debt-to-income (DTI) ratio when they determine how much you can borrow and the interest rate you pay for your home loan. The DTI is calculated by dividing total housing expense (including mortgage payment, property taxes, homeowners insurance, homeowner association dues and fuel expenses) by gross household monthly income.
Now that the conforming loan limit is increasing to 150%, borrowers can use a housing expense-to-income ratio of up to 45% for DTI calculations according to the Federal Housing Finance Agency (FHFA).
The FHFA allows lenders to consider several factors when calculating DTI. They include:
- the borrower’s total monthly housing expense, including the new conforming loan limit mortgage payment;
- rental payments for self-employed borrowers with income fluctuations;
- monthly debt obligation (including credit cards, auto loans and alimony);
- mortgage insurance premiums or any other recurring charges that show up on the borrower’s credit score;
- other recurring expenses necessary for the maintenance of housing (such as condominium fees or association dues); and
- the monthly income of non-occupant co-borrowers. (FHFA says lenders can use a 5% allowance when it comes to additional recurring charges, which means that the DTI would be limited to 50%.)
As the conforming loan limit is increasing to 150%, many people are wondering if they qualify for a jumbo mortgage. A conforming loan is a mortgage that falls within Fannie Mae and Freddie Mac’s baseline limit, which is set at $647,200 for a single-family home. Jumbo loans, on the other hand, are those that exceed the baseline limit.
With this new change to Freddie Mac and Fannie Mae’s loan guidance, lenders can use a housing expense-to-income ratio of up to 45% for DTI calculations according to the Federal Housing Finance Agency (FHFA). And as we stated above the FHFA allows lenders to consider several factors when calculating DTI.
Most importantly, the FHFA’s guidance states that a lender must thoroughly review any exceptions. Lenders can make use of automated underwriting systems when evaluating conforming loan limits, but they must also thoroughly review any exceptions. “It’s up to the lender to decide if they’re going to follow these guidelines,” Cohn said. “I think most lenders are excited for this new change and will definitely be using it.”
Given the dramatic increase in the conforming loan limit, we would expect borrowers to benefit from a rise in jumbo mortgages as well. “I think borrowers should look at who they work with and really shop around to get the best deal,” Cohn said.
Fannie Mae and Freddie Mac will implement the new conforming loan limits on Jan. 1, 2022.
Let Babak “The Mortgage Guy” at B2 Funding Home Loans be your guide to your new home – we can discuss the process and requirements. He’ll make it worth your time.
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