Good News! Loan Limits Will Increase in 2021

This week, the FHFA announced the new prospective conforming loan limits for 2021 - and it's good news! 

The FHFA is the regulator for Fannie Mae and Freddie Mac - the government entities that buy or guarantee certain types of mortgages, known as conforming loans (they conform to agency guidelines). 

Each year in November, the FHFA sets the conforming loan limit for the following year based on changes in the levels of local median home prices across the country.    

The 2021 loan limits increased by about 7.5% over 2020s. For instance, the single family baseline limit increased to $548,250 from $510,400, and the high-cost limit increased to $822,735 from $765,600. 

Conforming loans are often easier to obtain, lower cost, and more widely available to borrowers, so this increase in limits helps people that were planning on looking for mortgages in the $510k - $548k range in most of the country, and in the $765k - $822k range in high cost parts of the country such as San Francisco and New York. 

Loan limits vary by county and you can see the limit for your county here.  

Higher limits merely help buyers maintain their purchasing power on a square footage basis and keep up with inflation; if the government did not increase these limits to keep pace with inflation, eventually the pool of eligible homes would shrink considerably (i.e., at some point, only homes like this blue one, considered the skinniest home in America, would qualify).

Image credit: Visit Alexandria VA/Facebook

Housing analysts generally view this increase favorably as it appears to be roughly consistent with the amount of home price inflation that has recently occurred across most areas of the country.

In other words, if you are looking at a 2,000 square foot home that cost $310/square foot early in 2020 ($620,000 home price, $496,000 mortgage assuming 20% down payment), and is now priced around $330/square foot ($660,000 home price, $528,000 mortgage), you don’t have to worry that you won’t be able to use a conforming mortgage loan to make this purchase, because the $528,000 loan size is below the new $548,000 limit. 

In this example, the limit increase effectively preserves your buying power by allowing you to potentially qualify for the 2,000 square foot home (another way to look at is without this limit increase, you would only be able to get a conforming loan for at most a 1,932 square foot home assuming $330/square foot price ($330 x 1,932 x 80% loan = $510k, which was the old limit).  

The primary reason to pay attention to the level of loan limits when shopping for a home is that a jumbo loan, or a loan that is above the limit, will usually carry a higher interest rate and have tougher underwriting guidelines (rules that govern the amount of debt you are allowed to have). 

In many parts of the Bay Area, this means that a home >$1,028,419 purchase price will not be financed with a lower cost, more flexible conforming loan - unless you are planning to make a >20% down payment to bring the loan amount below $822,735. Of course, we have to add that there are so many different types of mortgage loans out there today, and ways to combine conforming and other products in one transaction to get the best possible rate and terms, so you should definitely talk to a mortgage professional to get guidance on what the cutoffs are for your particular situation and use that information to come up with a home search budget.    

This home is below the new loan limit, assuming 20% down payment:

Check out 5643 Comanche Drive in San Jose here.

This home is still above the new loan limit, assuming 20% down payment:

Check out 957 Higate Drive in Daly City, California here.

 READ MORE: When Is the Best Time To Buy a House?

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