If you have ever applied for a mortgage, you may have heard your loan officer throw around the term “jumbo” or “conforming” when discussing what mortgage solutions might be best for you.
Do not worry, they weren’t talking about a “jumbo” hot dog, airplane, or a two-liter of coke. What your mortgage lender was referring to was the mortgage loan limits set by the Federal Housing Finance Agency set for first mortgage loans.
Like many borrowers, you may be unaware that aggregators Fannie Mae and Freddie Mac are restricted by law to only purchase mortgage loans with balances below certain target limits (set forth by the FHFA). These limits are known as conforming loan limits because they conform to the rules set for purchase eligibility. Similarly, loans with balances over the conforming loan limit are considered ineligible for purchase by Fannie Mae and Freddie Mac and are referred to as jumbo mortgages.
Recently, the Federal Housing Finance Agency announced that the new baseline conforming loan limit is set to increase to $548,250 in 2021. This is roughly a 7.5% increase compared to the limit set in 20201.
So why should you care that the FHFA is raising the conforming loan limit? If you are on the cusp of meeting the current conforming limits, the revised guidelines may allow you to qualify for conventional financing. Similarly, if you also live in a designated high-cost area there also may be opportunities to refinance your mortgage from a jumbo to conforming conventional product.
The bottom line is that if you are looking to make a new purchase or refinance an existing mortgage in 2021, here there are several ways in which you can take advantage of the new upcoming conforming loan limits.
Maximize Your Home’s Equity
With the new conforming loan limits increasing in 2021 and the average U.S. 30-year fixed mortgage rate near all-time record lows, there has never been a better time to refinance.
The National Association of Realtors recently announced that home sales have shown year-over-year growth near 15.5%2. Similarly, CoreLogic noted that the Case-Schiller home price index recently grew over 23% higher than the last peak back in 20063. It seems the trajectory of home prices continues to ramp higher.
If you are an existing homeowner this is good news because your home continues to appreciate at an accelerated rate. You can further leverage that additional equity by refinancing your existing mortgage up to the higher conforming loan limit, lock in a low mortgage rate, and use the cash to reinvest back into your home through tangible improvements or upgrades.
Convert Your Existing Jumbo or High-Priced Mortgage Loan
Higher conforming limits might mean making the switch from a jumbo product to a conforming conventional solution much more feasible.
Traditionally, jumbo loans require more money down, often have higher costs and fees, and usually have slightly higher rates when compared to conforming loans. They also generally require additional hoops you must jump through in order to qualify, including higher credit scores, lower DTI ratios, and additional documentation requirements.
However, if your mortgage balance was considered ineligible under the prior limits, because it was over the conforming loan limit threshold, the new set limits may provide you with the opportunity to refinance your mortgage into a conforming conventional product.
Borrowers that own in designated high-cost areas should relish this opportunity as the new high balance limits for qualifying one-unit properties in these areas are 150% of $548,250 or $822,375 exactly.
Capitalize on Piggyback Second Mortgages
Even with the FHFA increasing the conforming loan limit threshold, your mortgage balance may still be too high to be considered a conforming mortgage should you wish to refinance. The good news is that you and your lender can get creative to help you capitalize on lower rates experienced by conforming conventional products.
Consider refinancing your higher balance mortgage using two loans. Pay off a large portion of the loan while simultaneously securing a piggyback or combination second mortgage as a subordinate lien. This will allow you to take advantage of the more flexible credit eligibility criteria and lower mortgage rates that conforming mortgages can offer while not having to go with a jumbo solution.
The trick is to make sure to weigh out all the costs and fees. Since you are applying for two loans, that may mean more out-of-pocket costs. Try and find a lender that will allow you to use some of the services from your first mortgage application in conjunction with the first (ex. the appraisal).
1 Fannie, Freddie conforming loan limits increase for 2021. (2020, November 25). Retrieved December 1, 2020, from https://www.housingwire.com/articles/fannie-mae-freddie-mac-conforming-loan-limits-increase-for-2021/
2 The downside of the hot 2020 housing market: Rapid home-price growth. (2020, December 01). Retrieved December 1, 2020, from https://www.housingwire.com/articles/the-downside-of-the-hot-2020-housing-market-rapid-home-price-growth/
3 Home prices see greatest gain in over 6 years. (2020, November 25). Retrieved December 1, 2020, from https://www.housingwire.com/articles/home-prices-see-greatest-gain-in-over-6-years/