This New Mortgage Change Could Increase Home Prices

Certified Mortgage Advisor
NMLS 1701021
Published 
October 6, 2021

This is good news for some and bad news for others

Two lenders are leading the way to increase the conforming loan limit for conventional loans to $625,000. As the average home price keeps increasing. A lot of people hit the ceiling of how large of a loan they can get with a conventional mortgage.

Jumbo loan

Now, as soon as they get a mortgage that's bigger than the maximum allowed by conventional loans, even $1 more than the maximum allowed by conventional loans, they have to use what's called a jumbo loan, which usually requires 10% down and is a lot tougher to qualify for.

Here's the change with the new loan limits in 2022

In 2021, our old limit was $548,250. This has increased by just over $75,000 to $625,000 as the maximum loan limit. Keep in mind, that this is the loan limit, not just the purchase price. So the purchase price is even higher than this as well.

How this works

Before, we have conventional loans all the way down from $0 up to what the old limit was which is $548,250, and now the new limit is $625,000. If you buy a home under that range, under that loan amount, you can qualify for a conventional loan with 3% down as a first-time home buyer. I know those many people in the comments are like, but it's actually 20. It's not, it's 3% down for first-time home buyers on conventional loans. Those are the rules. If a lender that you're is saying something different work with another lender.

When to get a Jumbo loan?

So when you hit the 3% limit, even if you are above this by even one. You then have to get a jumbo loan, jumbo loans are not conventional loans. You then have to, most of the time put 10% down.

There are all different types of jumbo products that range all over the place with different requirements. But 10% down is what you're going to run into most of the time. Normally there's a lot higher credit score minimum and they can be tougher to qualify for on your debt-to-income ratio, and if you're self-employed, they can ask for a lot more documentation as well. So these loans are a lot. Difficult to get.

Now, this is what's happened here with the purchase price. We already talked about the difference in the loan change from 2021 to 2022. This took 2020 one's maximum purchase price with 3% down on a conventional loan of $565,206 to $644,329 as a maximum purchase price. So this now means you can buy a home with a conventional loan. That's almost $80,000 higher in purchase price than you could. In previous years, just based on the loan limits here. Now, obviously, you have the stuff to be able to qualify for those payments and get approval without a loan. But with these max limits increasing, you're now able to buy a home that's $80,000 more expensive.

So what you're gonna find with this as well as it's likely people who will be able to put in higher offers as home values, continue to increase. They're going to have more leverage with conventional loans because before they might not have been able to use that leverage without getting into a jumbo loan that maybe they couldn't qualify for. Now that more people have access to these conventional loans, you can see this is $80,000 more in purchasing power that you could actually offer more on home again, with the caveat that you still have to be able to qualify with that higher loan payment.

No loan limits for FHFA yet

But what's weird about this year's change is the FHFA hasn't actually released their new loan limits yet. See, every year around November, the FHFA releases their maximum conforming loan limits.

What is FHFA?

Now don't confuse the FHFA with FHA is the Federal Housing Finance Agency. They're the regulatory agency that oversees Fannie Mae and Freddie Mac.

What is Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac make the rules for most conventional loans. So things like what's the minimum credit score, what's the down payment, debt-to-income ratio, things like that. So think of FHFA, Fannie Mae, and Freddie Mac's parents each year FHFA updates, their maximum conforming loan limits to follow along with changes in the US home price. So to prepare for the change, the lender, PennyMac said they would now accept loans up to $625,000.

The wholesale lender, United Wholesale Mortgage said they would do the same exact thing. And if you're actually not quite sure about what price range you are in. I have a video where I cover all the formulas loan officers use to find your maximum purchase price. So you can then find what price range is comfortable for you.

Now, this increase in loan limit is great news for people who are buying within the range of $550,000 and higher, because a conventional loan is an easier loan to qualify for than a jumbo loan. So buyers who are facing struggles of not being able to qualify in an expensive market will now. Easier time qualifying for a conventional loan with a lower down payment.

On the other hand, though, the bad news is that the higher home prices are going to be easier to qualify for because conventional loans are easier than gem loans potentially causing that price range of homes to get more competitive as more buyers in that range have access to easier finance.

Let's see the trend

Now it's interesting to see the actual changes in the loan limit in the median home price over a period of time. So this chart starts in 1981 and goes all the way to 2021. As we can see in the green, we have the median home price. So obviously we had this dip here in the 2008 housing crash in values of homes, and we're seeing this increase pretty significantly over the past few years.

Then we can also see the loan limit. The loan limit has always been charting along with the home price as it's increased. And we can see this huge difference now, especially with the 2020's numbers of the loan limit already here, we can see how big of a gap this is and how big this increase happened in this previous year.

So what's interesting is that FHFA is basically saying they don't see home values decreasing, otherwise, they would've kept stability within this loan limit here, as they did near the housing crash. So it will be interesting to see something very similar happen before the housing crash, where we had this really big increase in the loan limit as well. And then we saw home values decrease afterwards, correlation doesn't equal causation.

So it doesn't mean that because the loan limit increased so significantly that there will be repercussions on the other side, but it is interesting to take a look at what's happening with the data that we see in the past.

Let's wait for FHFA

So at this point, we'll have to wait to see what FHFA's. The actual loan limit change will be for 2022. It's likely that FHFA will increase their maximum loan amount to $625,000 or somewhere around there after all PennyMac and UWM are confidently accepting this as a new loan limit since FHFA tracks their loan limits with their house price index, which is showing a 19. 2% year over year price change. PennyMac and UWM basically jumped the gun based on the data that come out in hopes that they could be the first ones to get in on the action.

FAQs

Now, this all begs the question. How much home can you actually purchase? Two Hundred Fifty Thousand, Three Hundred Fifty Thousand, Six Hundred Thousand and two questions in there are how much could a lender approve me for? And what's an actual comfortable payment for my budget.

Talk with a loan officer
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