The Federal Housing Finance Agency (FHFA) has recently updated the conforming loan limits for conventional loans in 2022. The new baseline limit is $647,200, a significant increase of 18% from the previous year’s limit of $548,250. In areas with higher living costs, the limit goes up to $970,800. This applies to places like Alaska, Hawaii, Guam, the U.S. Virgin Islands, and any area where the median home value is 115% more than the baseline limit.
Loans that exceed these limits are known as non-conforming or jumbo loans. If you’re applying for a jumbo loan, be prepared for stricter requirements, like a higher credit score and larger down payment.
Understanding these loan limits is crucial if you’re a real estate investor. It can help you make strategic decisions about where to invest your money. For instance, single-family homes priced up to the baseline limit of $647,200 are likely to have the most demand and the best mortgage rates. If you factor in a 20% down payment, homes priced up to $809,000 should also get favorable rates. In high-cost areas, the most demand will likely be for homes priced between $970,800 and $1,213,500.
When it comes to the cost of conforming loans versus non-conforming loans, my experience since 2005 tells me that conforming loans are generally about 0.25% cheaper. While this might not seem like a big difference, it can add up, especially in high-cost cities like San Francisco.
The reason conforming loans are cheaper is because of Freddie Mac and Fannie Mae. These government-backed mortgage companies buy conforming loans from lenders and sell them to investors, which helps to reduce risk for lenders and allows them to lend more money.
If you’re a homebuyer, you’ll need to meet certain requirements to qualify for a conforming loan. These include a minimum credit score of 620, a maximum debt-to-income ratio of 43%, and a minimum down payment of at least 3%. The maximum loan limits for 2022 are $647,200 and $970,800 for high-cost areas.
Non-conforming loans, or jumbo loans, have different requirements. These loans don’t conform to the standards set by Fannie Mae and Freddie Mac, and they can include government-backed loans like VA, FHA, or USDA loans. The requirements for these loans can vary, but you’ll likely need a down payment of at least 20% to be approved.
Sometimes, non-conforming loan rates can be lower than conforming loan rates. This usually happens when lenders are eager for more business and are willing to take on more risk by offering lower interest rates.
Higher conforming loan limits can lead to increased demand for housing. More people can afford mortgages, and the requirement of only a 3% down payment for a conforming loan can bring in more capital. This is especially beneficial for self-employed individuals, who can now get a waiver to provide only the most recent year’s tax return instead of two.
Investing in real estate can be a powerful way to build wealth, especially with rising rents and capital values. Real estate crowdfunding platforms like Fundrise and CrowdStreet offer ways to invest in real estate without a mortgage, allowing you to diversify your holdings and earn passive income.
So, what do you think about the new conforming loan limits for 2022? Do you think they’re good for the real estate market and society as a whole? How are you using these higher limits to your advantage?
