Conforming Loan Limits Increase for 2021

Conforming Loan Limit Increase for 2021

If you’re planning on buying a home in 2021, you’ll probably be relieved to find out that the conforming loan limit will be increasing! This limit represents the amount that Fannie Mae and Freddie Mac can guarantee. Thus, the limit going up is positive for buyers because it means they can borrow a larger amount than before without it being riskier for the lender and becoming a jumbo loan. When you stay within the limit, you will have a lower annual percentage rate. Here is what you should know about these changes and how they may affect your house-hunting process.

How Much is the Increase?

Most importantly, you probably want to know exactly how much the increase is. It’s pretty sizable. The baseline limit for conforming loans in most areas in 2020 was $510,400 and the baseline limit for next year will increase by 7.5% to $548,250. The floor of the loan limit is now $356,362 which is an increase from the previous $331,760. In addition, the loan limit ceiling will increase from $765,600 to $822,375. This higher limit applies in areas with more expensive real estate such as Hawaii, Alaska, and the U.S. Virgin Islands. 

The Federal Housing Finance Agency (FHA) is responsible for determining the baseline which applies to single-family houses. This agency’s goal has always been to help borrowers who fall into the low- to moderate-income bracket, and they always announce these changes in November, just like they did this year. Since the FHA has increased the limit every year since 2016, the increase for 2021 does not come as a surprise. The increase was also expected since 2020 has come with increased home values. The percentage increase roughly matches how much home prices have risen this year.

How the Limit Works and What It Means for Mortgages

Since the National Housing Act was amended in 2008 by the Housing and Economic Recovery Act, the FHA has been required to keep this baseline limit at 115% of the median house price in the area. This is why the limit varies based on what area a borrower is buying in. To adjust the numbers as needed, the FHA uses the Metropolitical Statistical area and county in their calculations.

Some people have the wrong idea about what the conforming loan limit increase means. The changing limits have no impact on mortgage rates. While mortgage rates are determined by the state of the economy as a whole, conforming loan limits are based on home values. It’s possible for mortgage rates and loan limits to increase at the same time, but one is not causing the other.

Talk to a Local Mortgage Professional about Your 20201 Financing Needs