The new year represents a time when home buyers can take advantage of new mortgage limits that help them get into a house that fits their needs.
In 2008, the Housing and Economic Recovery Act mandated that the conforming loan limit used by conventional lenders must be adjusted each year to reflect changes that occur in the average home prices. This law helps to ensure that homebuyers have access to loans that are reasonable given the home prices in their area.
How Are FHA and Conventional Loans Different?
The loan limits that a homebuyer must comply with will vary depending upon the type of loan they get. An FHA loan is insured by the Federal Housing Administration. The Department of Housing and Urban Development regulates the loan limits for this type of loan.
People may choose this type of loan to help overcome potential barriers to home ownership such as a low credit score.
Conventional loans are not insured by a federal agency. Instead, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac) purchase and guarantee loans so that lenders can offer them to homebuyers.
Due to the differences between FHA and conventional loans, the limits set each year are not typically the same.
What Are Conforming Loan Limits?
Conforming loan limits are those that Fannie Mae and Freddie Mac must follow.
The Federal Housing Finance Agency regulates those organizations and sets the loan limits each year. They do so by using the House Price Index Report that is issued by the Federal Housing Finance Board.
In 2019, it was found that house prices increased by 5.38%. This percentage is used to calculate the maximum conforming loan limit for 2020. The limit in 2019 for a single-family home was $484,350.
In 2020, it is $510,400. Keep in mind that this is the baseline limit for an average housing market. High-cost living areas can have different loan limits.
What Are the Limits for High-Cost Areas?
Certain parts of the country are known for having higher housing prices. Parts of New York, California and Florida tend to fall into this category.
An area is considered high-cost if 115% of the median home value in the location exceeds the conforming loan limit. The loan limits for these areas are calculated by using a specific multiple of the median home value.
The limits are also capped at being no more than 150% of the current baseline conforming loan limit.
Currently, the majority of high-cost areas also saw home values rise. With the current baseline loan limit being $510,400 for an average priced area, high-cost areas can expect a maximum loan limit of $765,600.
What Are the FHA Limits?
FHA loan limits are influenced by those set for conventional loans, but they are usually slightly lower.
For a low-cost area, the 2020 limit is $331,760 for a single-family home. The FHA also extends higher loan limits for high-cost living areas, and there is a maximum ceiling on these limits as well.
What Are Jumbo Loans?
In some cases, buyers want to purchase a home that exceeds the loan limits. These loans are considered riskier for lenders since they are not backed by Freddie Mac or Fannie Mae.
Buyers face stricter requirements for these loans, such as higher credit scores, but it can allow a person to get into the house of their dreams.
Understanding how loan limits change from year to year helps homebuyers know their options for securing a loan in their desired area. Our loan specialists can help buyers find out the actual limits in their area, along with which type of loan works best for their budget.