As you look forward to purchasing a new home, whether it’s a first-time buy or you’re looking to expand, you want to make sure the purchase meets your needs and expectations.
Home financing is a critical part of the process. First, you have to understand the different financing options on the market, and what your loan limits are as you search for a new home.
What's in this article?
Some options you may consider include conforming and non-conforming loans. Knowing which kind of loan suits your needs best cannot be overstated, as it will save you from frustration and losses.
What Are Conforming Loans?
A conforming loan is a loan that complies with the guidelines set by Fannie Mae and Freddie Mac.
The investment loan must be under a specific dollar limit for a single-family home (exceptions do apply, including high-priced real estate markets).
Loans above the amount would fall into the non-conforming loan category and require higher cash-down payments.
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Conforming Loan Limits in 2022
Washington, D.C. – The Federal Housing Finance Agency (FHFA) on 11/30/2021 announced the conforming loan limits (CLLs) for mortgages to be acquired by Fannie Mae and Freddie Mac (the Enterprises) in 2022. In most of the U.S., the 2022 CLL for one-unit properties will be $647,200, an increase of $98,950 from $548,250 in 2021.
Conforming Loan Limits in 2021
The conforming loan limit set by Fannie Mae and Freddie Mac will vary depending on where you live, the type of home you are buying, and the number of units in the property.
The conforming loan limits went up from $510,400 in 2020, to $548,250 in 2021. Each year, FHFA (Federal Housing Finance Agency) reviews the limits for conforming loans based on the average US home price reported by the Federal Housing Finance Board.
For Hawaii, Guam, US Virgin Islands, and Alaska, the conforming loan limit is $822,375 or 150% of the standard conforming loan limit.
In 2020, the property value increased, where home values rose by 7.8% during the third quarter of 2019 and the third quarter of 2020.
Changes to Conforming Loan Limits in 2020
In 2019, most US counties had a maximum conforming loan limit of $485,350 with a few exceptions, including Alaska, Hawaii, and most high-cost areas where the cap was $765,600.
The changes in conforming FHA loan limits mean that you can finance a higher amount. However, if you exceed the mentioned loan limits, you have to look for alternatives, such as jumbo loans.
Benefits of Conforming Loans
These types of loans have numerous benefits. They include:
A Lower Down Payment: Conforming loans attract lower down payment requirements than non-conforming loans. For example, with Fannie Mae home loans or Freddie Mac loans, you will only need at least a 3% down payment to buy a home with a conforming loan.
Lower Monthly Payment: You enjoy lower monthly payments, especially if you have an excellent credit history. Conforming loan limits are based on average prices in specific markets and your income.
Lenders Like Working within Conforming Loan Limits: Lenders are well aware that Freddie Mac and Fannie Mae have insurance on these loans. That means they are much more comfortable selling them, because they adhere to all regulations, and are safe.
How You Can Take Advantage
As you are probably well aware, the housing market is dominated by buyers at the moment. If you find a house that you really want, you need to act fast, as it probably won’t be on the market for long. We also know that one of the best ways to ensure you get the house you want is through pre-approval. This is where the raise in conforming loans can really help you out.
Primarily, it gives you much more flexibility. Upping the cap on what you can get for a conforming loan means that you have a lot more options available to you when it comes to looking for the perfect house for your needs.
For some, that means finding a home that already has everything that they want. Obviously with the conforming loan limit raised, you can be more competitive and aggressive in bidding for that dream home.
For others, they enjoy finding a home that needs a little bit of work and transforming into something completely different. In this scenario, the limit being raised will probably add to your renovation budget, letting you tackle more projects and creating the perfect home that is in your head.
Make sure to talk to a local mortgage officer as soon as you can to learn exactly how the conforming loan limit raising affects you, and what you can do in the real estate market because of it.
Requirements for Conforming Loans
Just like any other loan type, there are requirements to meet. These include:
- Credit score minimum: 620
- Loan-to-value maximum: 97%
- Debt-to-income maximum: 45%
- Down payment minimum: 3%
If you’re a first-time homebuyer, you might have to make a minimum down payment of 3.5%. Look for down payment assistance or an expert to help you understand the terms.
Also, note that completing the minimal down payment may require you to purchase mortgage insurance that may vary with the home equity loan term.
A home mortgage loan of $625,000 with an LTV ratio of more than 95% and a 30-year duration may attract an insurance cost of 0.85% of the yearly loan amount.
Closing on Your Home Loan: What to Avoid
Some factors can affect FHA home loans. Furthermore, understand that even when the residential mortgage lender qualifies you for a certain amount, the actual amount you can get might be less depending on your financial background.
Some factors affecting loan qualification, including USDA loans, are as follows.
Having Multiple Credit Accounts Open
Applying for too many lines of credit within a short period may harm your credit score. It, in turn, affects how much money you can borrow.
Having Too Much Debt
If you’re looking for residential mortgage services, loan officers want to know that you can afford it by focusing on your monthly payments, not the total cost of owning the home.
Buying Expensive Items
If you’re closing on a more expensive house than your current one, it’s best to avoid buying too many high-ticket items and remodeling projects before closing the sale.
Doing so might affect your credit rating, especially when purchasing using your credit cards.
Additionally, keep in mind that even if you can afford all this now, down the line, unexpected expenses may mean falling behind on payments.
Limited Funds
Not having enough money in your account for the down payment and closing costs may affect your qualification, even when it’s a 2nd mortgage.
When you’re applying, mortgage companies want to see that you have enough funds in your bank accounts to cover all expenses, even when it is your second mortgage.
Changing or Quitting Your Job
You may want to wait until the home purchase closes because it might negatively affect your home loan qualification. Even when it’s a construction loan, don’t quit your job yet. The same applies when going for a VA loan for a second home.
Lenders will be more at ease when you have a stable source of income and have held your current job for an extended period.
Not Answering All the Questions
A mortgage company will ask you questions to determine your creditworthiness and financial stability. Make sure to answer all these questions honestly.
The last thing you want is for a loan officer to find out that you’ve been lying once you’re already a homeowner.
Fannie Mae Loan Limits: Talk to an Expert
To understand more about investment property loans and loan limits, speak to a lending expert or get down payment help.
Experts already know every detail of what is needed from you and will advise you appropriately, including enlightening you on the down payment assistance program.
Compass Mortgage is the place to be if you want undivided attention, a stress-free home buying process, and competitive terms. Reach out to us for all your home loan needs.