mortgage loans

What You Need to Know: Mortgage Loan Limit Changes for 2021

What You Need to Know: Mortgage Loan Limit Changes for 2021

This year, both on FHA loans and on conforming ones, loan limits or how much you can potentially borrow from a lender are increasing.

According to the Department of Housing and Urban Development and the Federal Housing Finance Agency this will take effect starting January 1, 2021.

In the coming year, do you intend to refinance your current mortgage or purchase a new home? And, on your radar, you’ll want these new restrictions. For each form of a loan, here is what you need to know.

Federal Housing Administration (FHA) Loans

In the more expensive housing markets, the maximum amount you can borrow on an FHA loan varies by market, with loan limits higher. The baseline limit will be $356,362 this year, a leap from $331,760 in 2020. The cap in such higher-cost areas is $822,375, up from this year’s $765,600.

The limit is also $822,375 for Home Equity Conversion Mortgage(HECM) loans, also referred to as reverse mortgages. These are insured through the FHA as well.

Dana Wade, assistant secretary of housing for the FHA and federal housing commissioner, seemed to be challenging the far higher caps, saying in a press release: “FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better-served by the conventional market. FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”

Conforming Loans

The limits are higher on conforming loans or traditional mortgages that qualify for Fannie Mae or Freddie Mac purchases (at least in most markets).

The current baseline limit is $548,250, up from $510,400 this year, and there’s a $822,375 threshold in more expensive markets. The FHFA states that conforming loan limits would increase in all but 18 counties in the U.S. based on these reforms.

Mortgage Loan Limits are Changing in 2021

Not big enough for new limits?

If you’re trying to buy a house in a higher price range than those listed above, then you still might have options. A nice one? That’d be the jumbo loan — a form of conventional home loan tailored for higher-priced assets.

Jumbo loan limits, often reaching far into the millions, are far higher than those on FHA and conforming loans. And while the exact criteria you will need to follow will vary by lender, these loan services appear to be more stringent than most mortgage options on the market that you will find.

The higher sums of loans make them riskier for mortgage lenders to sell. They must therefore be extra cautious about who they are lending to. They can also come with higher interest rates for these reasons.

In particular, you can expect to qualify for a reasonable credit score and a decent-sized down payment. Here’s a look at the newly expanded jumbo loan product from Embrace now:

In particular, you can expect to qualify for a reasonable credit score and a decent-sized down payment.

Credit score: You’ll need a credit score of at least 740 to apply.

Loan limits: With a 10 percent down payment, you can borrow up to $1.5 million and up to $2.5 million with a 20 percent down payment.

Usage: For both rate-and-term refinancing and for buying a new home, jumbo loans can be used. They are not available for refinancing by cash-out.

Property requirements: The primary residence must be the house that is being mortgaged. Such loans are not eligible for second homes or investment properties.

Loan Type: Depending on your priorities and how long you expect to stay at home, you can choose from either a fixed-rate or an adjustable-rate loan. Your loan officer will assist you in deciding the best choice for your case.

Bottom line

Home prices are rising, but so are the loan limits, so there are plenty of opportunities to buy a new house in 2021.

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Conventional Mortgage

What is a Conventional Loan?

A mortgage issued by a private lender without going through a government program is a conventional loan. When somebody says a mortgage is a conventional loan, they separate it from FHA loans, VA loans, or USDA loans.

Although this is an industry term, on their websites, lenders who sell conventional loans don’t necessarily mark their mortgages this way. They may simply refer to conventional loans as mortgages or label them fixed-rate or adjustable-rate mortgages, more descriptively.

What are the different forms of conventional loans?

Conventional mortgage loans may either be conforming or non-conforming. Here’s a little about the definition of those words.

Conforming loans

Conforming loans are mortgages that conform to the maximum loan amounts set as defined by the government or other laws. They are government-sponsored firms that, if borrowers default on some forms of mortgages, promise to pay lenders.

The maximum amount that conforming loans should not surpass is calculated by the Federal Housing Finance Agency. By 2021, in most areas of the U.S., a single-unit property qualifies for a conforming loan of up to $548,250

Notice that Alaska, Hawaii, Guam, the U.S., are exceptions. High living costs in the Virgin Islands and other parts of the world. $822,375 is the highest loan cap in these areas. Mortgages with these massive loan amounts are referred to as jumbo loans that conform.

Nonconforming loans

Loans are non-conforming if they are greater than the maximum amount permitted in a region by the FHFA or if they deviate from other conforming loan conditions. Some non-conforming loans are aimed at individuals in unique circumstances, such as individuals who purchase a wide stretch of land or self-employed individuals.

Such non-conforming loans are intended for homebuyers who are deemed more likely to default. Usually, these mortgages are costly and may contain clauses that would not be appropriate for a conforming loan, such as allowing the borrower for a certain period of time to make interest-only payments.

Fixed or Adjustable Rate

There may be fixed interest rates or flexible rates on conventional home loans. The interest remains the same for a fixed-rate loan for the whole life of the loan, and every month the borrower makes the same principal and interest payments. For an adjustable mortgage rate, the interest rate stays the same at the outset of the loan for a fixed period of time. The rate will go up or down at that point, and the sums due each month for the principal and interest will adjust as well.

What is a conventional loan’s minimum down payment?

In order to keep monthly costs lower and build equity in the house, conventional wisdom suggests that homebuyers should make a down payment of at least 20% of the price of a home. And you’re typically not allowed to purchase private mortgage insurance if your down payment is at least 20 percent.

Around the same time, coming up with a 20 percent down payment is easier said than done. It’s not always possible to put 20 percent down, especially for people buying their first home.

With a lower down payment, you might be able to get a conventional loan, but you can expect higher interest and fees to be paid. Some lenders make down payments of as little as 3%

In the third quarter of 2020, according to the National Association of Realtors, the median price for an existing single-family home was $313,500. With that amount, a down payment of 3 percent on a home will be $9,405.

However, it’s normal for lenders to request at least a 5 percent down payment. That amounts to a down payment on the median-priced home of $15,675.

Is a conventional loan difficult to get?

Your credit ultimately depends on whether you are likely to be accepted for a conventional loan. Usually, lenders want borrowers with loan ratings above the mid-600s. And if your credit scores are in the mid-700s or higher, you have a greater chance of being given a favorable interest rate.

You could find it easier to apply for an FHA loan if your credit isn’t great. If your credit scores are on the lower side or if you want to make a down payment of less than 10 percent, an FHA loan is often less costly than a conventional mortgage.

Individuals with a bankruptcy or foreclosure may be more likely than other forms of loans to get accepted for an FHA loan. But if you have good credit and are willing to make a sizable down payment, FHA loans are usually more risky than conventional loans.

The valuation procedure for FHA loans is also more rigorous than conventional loans. Although lenders usually need an appraisal to ascertain the home’s worth before granting a mortgage, an appraisal for an FHA loan assesses both the value of the property and if it meets the program’s eligibility criteria.

For aspects such as structural soundness and well-functioning plumbing and electrical systems, homes must meet comprehensive specifications and must not present any problems with health or safety. If the appraisal shows issues, before the buyer could get an FHA loan, the seller will have to make repairs. Without substantial renovations, if the property can not be brought up to date, it will not be possible to get an FHA loan.

A seller who does not want to deal with this evaluation process will be less likely to consider a bid financed with an FHA loan than a conventional loan-funded offer.

What is the best form of mortgage for me?

Your individual finances depend on whether you’ll be better off with a conventional loan or a mortgage through the FHA or another program.

To help you decide, here are some questions to ask yourself.

  • Have I checked my financial condition and considered how much to spend on a house I can afford?
  • Do I have enough cash to make a 10 percent to 15 percent down payment?
  • In the past seven years, has my credit history been free of negatives, such as default or bankruptcy?
  • Are my credit scores higher than the mid 600s?

A traditional loan could be right for you if the answer is “yes” to these questions. You’ll also want to weigh the debt-to-income ratio and what your budget can afford to pay annually.

Either way, contacting many lenders to learn more about which loans you might apply for and to compare your choices is a good idea.

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