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If you’re looking for a mortgage in a competitive market, meeting loan limits could make or break your chances – and this year the numbers have changed.
The Housing and Economic Recovery Act (HERA) of 2008 requires that compliant loan limits (the maximum dollar amount of home loans that can be guaranteed by government agencies) be adjusted annually to reflect changes in the housing market. housing.
Loan limits for 2021 have been raised to $ 548,250 in many parts of the United States, but in some counties they are higher. All of the above becomes a “jumbo loan” which will make obtaining a mortgage much more complicated and expensive. Compliant loans are easier to qualify because they require a lower down payment, lower credit rating, and lower cash reserves.
âIt’s like two different worlds,â said Jennifer Beeston, branch manager and senior vice president of Guaranteed Rate Mortgages, a retail mortgage lender.
So let’s describe how these loan limits work and how they could affect the purchase of your home.
What is a compliant loan?
The federal government sets limits each year on the amount of loans it is prepared to purchase from mortgage lenders. If the loan falls within this limit, it is a conforming loan. For 2021, the limit is $ 548,250, which is an increase from 2020, when the limit was $ 510,400. In some high cost areas that limit increases, up to a maximum of $ 822,375.
Since mortgage lenders want their loans secured by Fannie Mae and Freddie Mac (the government sponsored companies), borrowers are usually required to meet compliant loan limits when taking out a mortgage. Mortgages above government limits are called non-conforming loans or âjumbo loansâ.
The government guarantee means that compliant loans are less risky for banks and the requirements for such loans can be less stringent. The down payments and the interest rates can be lower, and you can avail these loans with a lower credit score.
Compliant loan and non-compliant loan
The main difference between a compliant loan and a non-compliant loan is flexibility. Soft loans, or jumbo loans, are considered riskier for lenders, so they often come with more stringent requirements.
You can expect a minimum down payment of 20% or more on a jumbo loan, versus as little as 3% on a compliant loan. (Regardless of loan type or requirements, many financial experts and former buyers recommend always paying 20%.) You will also need a higher credit score and more income to qualify for loans. non-compliant.
The non-conforming loan will usually carry a higher interest rate and require the borrower to have cash reserves. For today’s jumbo loan rates, see here.
Current Limits of Compliant Loans
The 2021 benchmark limit for compliant loans is $ 548,250, up from $ 510,400 the previous year. The 7.42% increase reflects a similar percentage increase in average US home prices between 2019 and 2020.
This limit, however, is not the same across the United States. In some high-cost areas, the limit increases by almost 150 percent, to $ 822,375.
High cost areas are usually around major subways with hot real estate markets. This map provided by the federal government shows exactly where each loan limit applies.
Who sets the loan limits?
The limits are set annually by the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.
The limits are intended to reflect average home prices in the United States and are based on the agency’s annual home price index. With the housing market increasingly competitive over the course of the Covid-19 year, it is no surprise that compliant loan limits increase in line with selling prices.
âThere has been a significant increase this year in the maximum loan amount allowed for a mortgage to be a conventional loan before it has to be a jumbo loan. This is great news for homebuyers as it provides more flexibility when looking to buy their next home, âsaid Bill Banfield, executive vice president of financial markets for Rocket Mortgage, in an email.
The increase in loan limits, however, may not keep up with some particularly competitive markets in the country. Angela Moorman, a home loan designer at First Home Bank, said she is seeing more giant loans due to the rapid rise in house prices in the Indianapolis area.
âIt destabilizes the low and affordable housing market,â Moorman said.
If you are counting on an affordable loan, check the compliant loan limits for your area and look for homes within that budget. Otherwise, you could end up with a more complicated and expensive mortgage.
How does this affect my home buying process?
Most buyers, especially first-time buyers, rely on a low down payment and low interest rates to make the purchase affordable. These benefits are easier to access with a compliant loan.
So, before you seriously start your home search, be sure to check the loan limits for your area (remember the map). This will serve as a benchmark for homes that you can buy with less than 20% down payment and relatively simpler requirements.
Be aware of how the boundaries change from county to county, as you could find yourself in jumbo loan territory without realizing it. For example, the loan limit in Monmouth County, New Jersey, is $ 822,375. But cross the border into Mercer County, and the limit drops back down to $ 548,250,
âIf you’re near that edge and you think you could go further, you’ve got to see if you qualify for the jumbo,â Beeston said.
If you end up needing a non-conforming loan, that’s okay. You will just need to make sure that you have the cash to pay the down payment and the higher reserve requirements.