What You Ought to Know About Conforming Loan Limits

Owning a home has always been on the agenda for those keen on achieving the American dream. There’s something incredible about being the proud possessor of a home that you can call your own. Buying a house is often one of the biggest investments that people make in their lifetimes. In many cases, finding that elusive dream house can be so difficult that many people despair of ever finding it. Even if you find it, there’s no guarantee that the terms and conditions will suit you perfectly. Moreover, if finding a house is tough, negotiating the paperwork and finding the finances to pay for it are even more complex.

What are the Different Kinds of Mortgages Available?

The decision to move from being a renter to a homeowner can be financially (and emotionally) complex. You might have found the property of your dreams. However, paying for it (or organizing the finances to pay for it) can be quite intimidating. For starters, not everyone has the money to pay for their dream homes upfront. So, these people usually need to take out mortgages. A quick Google search will show a wide selection of loans available for homebuyers. Selecting the best mortgage from the options available can be quite crucial. For this, you’ll need to do your homework. In short, you’ll need to be aware of the different kinds of mortgage loans out there.

There are two kinds of mortgages that homebuyers usually consider. These comprise:

• Conventional Loans: Various private entities such as banks, credit unions, and private lenders offer these loans. To qualify for these loans, you’ll need to have good credit. This is because no external entity guarantees these loans. As such, the risk of the borrower defaulting presents a significant risk to the lender. These loans typically feature terms of 10, 15, 20 or 30 years. Borrowers need to make larger down payments on these loans as well. In many cases, borrowers need to pay at least five percent of the property value. However, this amount could vary based on the borrower’s credit history and the lender.
• Government-backed Loans: These further comprise:
  • Federal Housing Administration (FHA) Loans: These loans emerged from the provisions of the National Housing Act of 1934. The FHA provided mortgage insurance on loans disbursed by private lenders. In case the borrowers defaulted, the FHA backed these loans financially. Lower-to-middle-income homebuyers can use these loans for purchasing homes by making a down payment of as little as 3.5 percent. However, only FHA-approved lenders can offer these loans.
  • Veteran Affairs (VA) Loans: People who serve in the military or are veterans are eligible for these loans. These loans feature minimal down payments and low-interest Moreover, they offer favorable terms even if the borrower had a foreclosure or bankruptcy in the past. To obtain these loans, you’ll need to consult a lender with experience in serving military clients. These loans typically follow a unique process, which requires the borrowers to submit specific documents.
  • US Department of Agriculture (USDA) Loans: These loans are ideal for rural property buyers who meet certain income requirements. Backed by the USDA, these loans offer low-interest rates and no down payments.

The Significance of the Size of Your Loan

For many people, the rate of interest is among the most important things associated with a loan. However, the size of the loan that you are taking is equally significant as well. For starters, the amount of money you borrow will have an effect on the rate of interest that you need to pay. Also, the size of your loan will highlight the levels of risk you bear to the lender. For these reasons, people bifurcate home loans into the following categories:

• Conforming Loans: These loans adhere to the loan limit guidelines that the government-sponsored mortgage associations (e.g. Freddie Mac and Fannie Mae) have prescribed. Based on these guidelines, the limits on conforming home loans for single-family units in most of the continental US stands at $417,000 for 2016. For four-unit properties, this limit rises to $801,950. In Alaska, Guam, Hawaii and the US Virgin Islands, the limits for one-unit and four-unit properties is $625,500 and $1,202,925 respectively.

In other words, the Conforming Loan Limit (CLL) refers to the maximum principal loan amount beyond which Fannie Mae or Freddie Mac cannot purchase residential mortgage loans. By purchasing these mortgages, Fannie Mae, and Freddie Mac provides a secondary market for mortgages. As a result, lenders package the loans into investment bundles and sell them to these agencies. After that, these lenders are free to disburse loans again.

• Non-conforming Loans: In some cases, borrowers might take out home loans for amounts that are higher than the conforming loan limits applicable in their areas. Lenders term these loans as jumbo loans. Jumbo loans are highly risky. Therefore, they come with higher interest rates to protect the interests of the lenders. In many cases, lenders might require the borrower to make a down payment of at least 20 percent for availing these loans. Alternatively, they might require the borrower to have an excellent credit score before qualifying for the loan. Situations could arise where some borrowers do not meet the lending guidelines for standard loans. This is so even if the loan amount is well within the CLL prescribed. These individuals would need to take out non-conforming loans because they:
  • Have a high Loan-to-Value (LTV) ratio
  • Have bad credit i.e. a credit score of less than 620
  • Have high volumes of debt
  • Have a recent history of bankruptcy
  • Have a high Debt-to-Income (DTI) ratio or,
  • Have various documentation issues such as not being able to provide proof of employment history, income and assets

The average homebuyer usually targets staying within the conforming loan limits. Doing so enables the homebuyer to avail of lower rates of interest. To stay within the prescribed limits, these buyers will look for properties priced beneath the loan limits prescribed for their areas. However, it is worth mentioning that homeowners can still purchase properties priced higher than the conforming loan limits. They can do this by making a large down payment, which would make their loan amount stay within the conforming loan limits. Alternatively, they could use a home equity line stay below the conforming loan limit.  Finally, they could use a high-balance loan or jumbo loan, which gets around the loan limits.

Who Determines the Maximum CLL Applicable for Mortgages?

The Federal Housing Finance Agency (FHFA) bears the responsibility for determining and publishing the maximum CLL limits applicable for mortgages that Fannie Mae and Freddie Mac acquire in any year. It typically does this based on October-to-October home price data. In many cases, the FHFA announces the new rates in November, which come into force the following January. The Housing and Economic Recovery Act of 2008 established the baseline loan limit at $417,000. The Act also specified that the baseline loan limit would not increase until the prices of homes return to pre-decline levels.

The FHFA ruled that the value of the average US home in the third quarter of 2015 remain below its level in the third quarter of 2007. As a result, it retained the limit of $417,000 applicable to single-unit homes in the continental US for 2016. However, the FHFA did increase the CLL for 39 high-cost counties in 2016. It did this because it found that the value of homes in these areas increased over the prior year. Click here to locate the list of counties impacted by this change.

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