Each year, the Federal Housing Finance Agency (FHFA) sets new baseline loan limits for various types of home loans to reflect the average home price in the U.S. Conventional loans, also known as conforming loans, are guaranteed by Fannie Mae and Freddie Mac and make up most of the loans in the U.S. As you can imagine, some home buyers may seek a loan above the conforming limit. In this case, they may qualify for a non-conforming loan, known as a jumbo loan. Another common type of home loan is an FHA government loan (Federal Housing Administration).
Conforming loans and High balance loans
Conforming loans were designed for homebuyers who meet the guidelines set by Fannie Mae and Freddie Mac and for those who seek a mortgage that falls under the baseline loan limit. Most importantly, there are benefits to conforming loans that may include lower mortgage rates and lower down payment.
However, some areas of the U.S., such as San Francisco and New York City, have loan limits that are set at a higher amount as the average home prices are significantly higher in those areas. Also known as High Balance Limits, these limits are 150% of the conforming baseline limits. Therefore, home buyers purchasing a home in those bigger metropolitan areas can still meet the conforming loan criteria.
What if I don’t qualify for a Conforming loan?
Whether a home buyer does not qualify for a conforming loan due to the credit or down payment requirements, or because they are seeking a mortgage that exceeds the conforming loan limit, they likely have alternative options.
For instance, if the loan amount exceeds the conforming loan limit, they may instead qualify for a jumbo mortgage. Because non-conforming jumbo loans are considered riskier for lenders, they often require a heftier down payment, higher mortgage rate, and more stringent credit qualifying criteria. There are no limits on jumbo loans.
On the other hand, if the buyer does not qualify for a conforming loan based on other circumstances, they may qualify for an FHA loan. FHA loans are government-based loans that have more lenient credit requirements and require as little as a 3.5% down payment. The downfall to these loans is that they typically come with higher mortgage rates. As with
Conforming loans, FHA loans also have a limit that rises each year and is 65% of the conforming baseline limit.
What’s the Conforming loan limit increase for 2021?
Below is a table describing the increased limits for the programs we previously discussed. As you can see, the limits for high balance loans and FHA loans are directly based on the current conforming loan limits.
How does this affect prospective or former homebuyers?
Conforming loans are advantageous for those who qualify as they provide many long-term financial benefits. Therefore, it is essential to know whether you qualify for this type of mortgage. Besides, if you are a previous home buyer and had to take out a jumbo loan because you were over the conforming loan limit, this may be a great time to refinance if your loan now falls under the new limits. In the alternative, if you currently have an FHA loan, you may want to investigate refinancing in the event you now qualify for a conventional loan. If you are a first-time home buyer, the increase in conforming loan limits is another positive check mare as to why it is time to buy your first new home! Regardless of your situation, if you are looking to purchase, refinance, or just inquiring about the positive changes for home loans in 2021, you should reach out to a trust loan officer to further inquire.
If you are interested in taking out a home loan or refinancing your current loan, be sure to contact a loan officer today!