Each year, the Federal Housing Finance Agency (FHFA) reviews current mortgage loan amount limits and revises them if needed. Lenders of conforming mortgage loans will not lend in amounts that exceed these limits. While you can get a mortgage that’s not a conforming loan, they are going to cost you more money in fees and interest. If you’re looking to purchase a home on the high end of the spectrum, these limits may impact how and where you buy.
What Is a Conforming Loan?
The federal agencies Fannie Mae and Freddie Mac are the largest purchasers on the secondary mortgage market. By law, these agencies cannot purchase loans that exceed the FHFA limits. Conforming loans must also meet other Fannie Mae and Freddie Mac guidelines, such as keeping within their stated debt-to-income ratio (DTI), adhering to their credit requirements and providing proper documentation on the loans. Since lenders know that there is a high probability that these mortgages will be purchased on the secondary market, they have less risk and are able to offer more attractive rates to home buyers.
Why Are There Loan Limits?
These loan limits are a result of the Emergency Home Finance Act, which was signed into law by President Nixon in 1970 and was intended to make additional funds available to the home mortgage market. Inflation was rampant during the 1970s, and the housing market suffered because of it. When the FHA raised the interest rates on its mortgage to 8.5 percent, lawmakers stepped in passed the bill, which also created Freddie Mac which was supposed to help stimulate the secondary mortgage market.
The government put these loan limits into place because the audience for the programs it built was the lower-to-middle income demographic. Lenders can and do issue loans, called jumbo loans, that exceed these limits, but they cannot be purchased by either Fannie Mae or Freddie Mac.
What Are the Limits for 2016?
There was very little change in the loan limits set by the FHFAÂ for 2016. Each county across the country is assigned a limit. Most counties are limited to the lowest amount while major metros have much higher limits. Some counties fall somewhere in between. The limits for 2016 are:
- Single-family homes: $417,000 to $625,500
- Duplexes or two-family homes: $533,850 to $800,775
- Three unit properties: $645,300 to $967,950
- Four unit properties: $801,950 to $1,202,925
In fact, only 39 counties had their loan limits increased for 2016, and none had the limits lowered. Most of the counties that saw an increases are centered around Denver, Boston, Nashville and Seattle. There were also four counties in California that received an increase.
The Department of Housing and Urban Development (HUD) sets the loan limits for the Federal House Administration (FHA). Like the FHFA, it sets different limits depending on whether the county is a high-cost or low-cost area. The FHA limits for 2016 are:
- Single-family homes: $271,050 to $625,500
- Duplexes or two-family homes: $347,000 to $800,775
- Three unit properties: $419,425 to $967,950
- Four unit properties: $521,250 to $1,202,925
How Do the Limits Impact Me?
If you’re planning to purchase a single-family home that’s less than $417,000 (or $625,500 in specific high-cost areas), then you won’t be impacted at all. But if you’re planning to purchase a high-end home, you may wind up taking out a jumbo loan, which has higher fees and interest rates. If you’re moving from one county to another, you might also wind up hitting the cap even though you’re buying a home similar to the one you’re selling.
For example, if you currently live in a suburban or rural area with affordable housing rates but are moving to Connecticut’s Fairfield County, New York City or many of the counties in Southern California, you’ll wind up paying a much higher price for the same type of home. In this case, you may wind up hitting the loan limits, especially if the county’s limit is at the $417,000 mark or close to it.
What Is a Jumbo Loan?
A jumbo loan is a mortgage that exceeds the FHFA loan limits. The qualification process is similar to that of a conventional mortgage, except that lenders often require that you have two appraisals on the house you’re planning to buy instead of one. Jumbo loans also require higher down payments, usually 15 to 30 percent of the purchase price of the home.
If you apply for a jumbo loan, you may also be required to have a credit score of at least 700 and a DTI of 43 percent or less. Lenders also look for borrowers with enough cash reserves to cover six to 12 months of mortgage payments and you’ll have to properly document your income. You may wind up with an adjustable-rate jumbo loan, as fixed-rate mortgages of this type are somewhat rare.
Can I Get a Conventional Loan that Exceeds the Limits?
Some borrowers are able to take out a combo loan so that they can purchase a home that exceeds the limits without having to go the jumbo loan route. In this case, the lender would give the borrower a first and second mortgage with the first mortgage within the FHFA loan limits. For example, if you’re purchasing a home for $475,000, you could take out a first mortgage for $417,000 and add on a second mortgage for $58,000. Be careful about this type of loan, however, as second mortgages come with steep closing costs and interest rates.
2 Point Highlight
There was very little change in the loan limits set by the FHFAÂ for 2016.
If you’re planning to purchase a single-family home that’s less than $417,000 (or $625,500 in specific high-cost areas), then you won’t be impacted at all.
