If you’re in the market for a house any time soon, you’ve probably noticed there are lots of big numbers to pay attention to in order to be well informed as you shop for a home. Well, thanks to a recent announcement about new loan limits from the Federal Housing Finance Agency, we have more numbers for you to keep in mind! But don’t worry; you don’t have to commit them to memory. Just get an idea of what the loan limits are and why they changed—and then let us know if you have any questions about them.
So, let’s start with what loan limits are. The most popular type of home loan is a conforming loan, as this is the easiest type to qualify for. But to be considered this type of loan, the amount needs to be below a certain limit. Who chooses the loan limits? The Federal Housing Finance Agency—which is in charge of regulating government-backed Fannie Mae and Freddie Mac loans—decides on the loan limits based largely on the most recent median home prices. As the median prices increase, so do the loan limits, which is why they periodically go up. In fact, the loan limits have increased every year since 2016—after years of staying the same—so new numbers for 2021 aren’t surprising.
In 2020, the loan limit was $510,400, meaning any conforming loan had to be below that amount. And for 2021, the new limit is $548,250. That’s a 7.5% increase from last year! And as you might guess, the main reason for this is the higher median home price—as home buyers need to borrow more money to get the same type of house compared to the year before.
So as you start looking for a house to buy in 2021, and you notice your dream home would require you to get a loan worth $520,000, rest assured you should be able to get a conforming loan for that amount—which wasn’t the case last year. That’s why for many home buyers, it’s actually a relief to see higher loan limits for 2021!
In most parts of the US, a home loan for $548,250 or even less can get you a nice house. After all, the median home price in 2020 is about $320,000, and that’s high compared to recent years. So most home buyers across the country don’t have to worry about coming close to the loan limits when they buy. But if you’re looking at that number and thinking you could probably only get a fixer-upper for that price, you probably live in a high-cost area! And that’s okay, because the Federal Housing Finance Agency hasn’t forgotten about home buyers in your situation.
In fact, there are higher loan limits created specifically for high-cost cities and states, meaning you can spend more than $548, 250 on a house while still getting a conforming loan. This is all thanks to the Housing and Economic Recovery Act of 2008, or HERA. This act was responsible for creating a permanent formula that could increase loan limits for high-cost areas in the US where 115% of the median value of homes nearby is higher than the baseline conforming limit that most other areas adhere to. Simply put, if you live in a city or state where the median home value is much higher than the average in the US, you get different loan limits than everyone else.
More specifically, for 2021, the higher-cost loan limit is $822,375, which works out to 150% of $548,250. If that sounds like a more reasonable price for a home, you either live in an area that qualifies for the higher loan limits…or you just have expensive taste in housing! Not sure which one it is? Some examples of areas that get the higher loan limits include Southern California, New York City, San Francisco, and parts of South Florida. But that’s not all. Several states have entire counties that get the higher loan limits, and these limits usually apply to the entirety of Hawaii, Alaska, Guam, and the U.S. Virgin Islands. To find out which loan limits apply to you, feel free to check the Federal Housing Finance Agency’s website, or ask your real estate agent for help determining this.
If the new loan limits are still lower than the house you have your eye on, you have a few options while still being eligible for a conforming loan. First, keep in mind that the loan limits only apply to the amount you need to borrow from a lender, not the total cost of the house. So if your dream home is $600,000, you might be about $51,000 over the loan limit of $548,250. But if you’re planning to make a down payment of $60,000—or 10% of the total—you’ll only need to borrow about $540,000, keeping you just under the limit!
If the amount you need to borrow is still over the limit even after your down payment, consider putting more down if possible. If you can’t come up with that kind of cash upfront—which is definitely understandable—another option is to get two loans. For example, you can get a conforming loan to cover most of the total, and then apply for an FHA loan to pay for the rest.
If neither of these options sound good to you, it’s time to think outside the box, or in this case, outside the conforming loan. That’s right; it’s time to consider a non-conforming loan! Also called a jumbo loan, this type of mortgage allows you to borrow more than the conforming loan limits. Not surprisingly, it has some pros and cons that come along with it.
First, because jumbo loans are too expensive for Fannie Mae or Freddie Mac to guarantee, lenders consider them to be risky. In order to make up for this, most lenders require you to have a very good credit score—typically at least 700 or even 740—to qualify for a jumbo loan. You also usually need a down payment of at least 20%, though some lenders might allow you to put down as little as 10%. But basically, this is not the type of loan to get if your credit score is average or if you weren’t planning on putting much down!
If you do qualify for a jumbo loan, you should expect to pay closing costs that are a bit higher than average. And some lenders also attach higher interest rates to jumbo loans. However, if you shop around with different lenders, you may be able to find a jumbo loan with an interest rate that’s the same or possibly lower than what you would get with a conforming loan.
If you’re not sure what kind of loan is right for you—or if you want to know which loan limits apply to the house you want to buy—your real estate agent can guide you. If you don’t have one yet, you can count on LemonBrew to connect you with a Partner Agent who will answer all your questions on your journey to finding your dream home!