What You Need to Know: Mortgage Loan Limit Changes

What You Need to Know: Mortgage Loan Limit Changes

January 6, 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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