Some mortgage lenders just made a huge move to entice mortgage shoppers who are looking for large loan amounts at low rates and flexible terms.
A few lenders are now offering conventional loans up to $625,000 — more than $75,000 over the official limit set by the Federal Housing Finance Agency (FHFA), the overseer of Fannie Mae and Freddie Mac.
The standard 2021 conventional loan limit stands at $548,250. But many lenders have run the numbers and deemed it safe to offer larger loans in anticipation of a big increase to 2022 conventional loan limits.
This could prove a great opportunity for homebuyers and refinancing homeowners at higher price points – if they find a participating lender.
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The year 2021 will go down in history as the first year that some mortgage lenders, including Fairway Independent Mortgage Corporation, which owns Home.com, made higher conforming loan limits available this far in advance.
Typically, banks and mortgage companies start accepting larger loans upon the official FHFA loan limits announcement around late November.
But in 2021, there was such a run-up in home prices that a few lenders offered an anticipated amount much earlier.
The new offering is set to help homebuyers and refinancing homeowners alike.
This is a welcome development for homebuyers at higher price points.
For instance, someone purchasing a $785,000 home in Anderson County, Tennessee would have to put down $236,750 to stay within their county’s conventional loan limit. Now, they could put down just $160,000 and still receive a conforming loan if they met all other requirements.
If not for the early release, many homebuyers would have to opt for a jumbo loan, which may come with tougher qualification criteria and higher rates.
Despite the good news, homebuyers should keep in mind that higher loan amounts are not available for some Fannie Mae and Freddie Mac programs, such as HomeReady, Home Possible, renovation loans and others. Additionally, some lenders may require a higher down payment than for loans at or below 2021’s official loan limit, and it’s likely that only 1-unit homes are eligible for the program.
Buyers looking for some conventional loan features may have to wait until the official FHFA announcement or even until 2022 to use new higher limits.
Each lender may set different rules, so check with your lender on what they offer.
Rates are near historic lows, but refinancing can be a challenge for those who need a jumbo loan.
These loans often come with stricter requirements and higher rates.
The new $625,000 offering could open up an opportunity for homeowners to refinance out of their jumbo loan and improve their loan terms.
For instance, many jumbo loans come with adjustable rates, meaning they are fixed for a few years then adjust to market conditions. A homeowner’s rate could jump from 2.5% to 3.5%, for example, if rates rise in the future.
Now, homeowners with at least 20% equity could refinance with a new fixed rate loan up to $625,000, locking in their principal and interest payment for as long as they have the loan.
The increase came just in time.
Rates are low now, around 3% according to Freddie Mac. But the same agency predicts a 30-year fixed rate at 3.5% by early 2022. On a $625,000 mortgage, a 0.5% increase in rate translates to a payment that is $172 per month higher.
Homeowners can take advantage of low conventional rates now instead of taking their chances in 2022.
In an already difficult 2021 market, the new $625,000 conforming loan limit offering is easing at least one part of the process: affording a home that cost 10-20% more than it did a year ago.
According to the FHFA, home prices rose 19.2% between July 2020 and July 2021, with some areas appreciating even more than that.
Higher home prices require higher loan amounts, and many lenders are providing those larger loans as mortgage consumers seek to buy and refinance more expensive properties.