Increase in loan limits on compliant mortgages in 2021

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When you apply for a mortgage to buy a home, your loan is classified by your lender as a “compliant loan” or a “jumbo loan”. This classification can make a big difference in loan approval conditions, as well as interest rates.

A “compliant loan” falls within the loan limits set by Fannie Mae and Freddie Mac. Fannie and Freddie are government sponsored entities (GSEs) that buy mortgages in the secondary market. Both GSEs guarantee that they will buy “conforming loans” – but not jumbo loans.

This means that banks are more willing to work with loans below Fannie and Freddie’s limits because they know there is a buyer for the loan and they won’t have to keep it on their own books. Lenders generally prefer to sell their loans so that they in turn can lend to more borrowers, since they have little money to lend. Qualifying for compliant loans also tends to be easier, as the lenders who resell the loans are unlikely to handle a default on their own.

Compliant loan limits increase in some years, and they will increase in 2021. This will be the fifth year in a row that Fannie Mae and Freddie Mac have increased the limit on how much you can borrow while still being eligible for a compliant loan.

Here are the new compliant loan limits for 2021

According to the Federal Housing Finance Agency, the new loan limit for compliant loans in most parts of the country climbs to $ 548,250 in 2021. That’s $ 37,850 more than the 2020 limit of 510,400. $ and concerns single unit properties.

In some areas of the country where house prices are much higher, there is a different conforming loan limit. Specifically, a higher limit applies when 115% of the local median of the home exceeds the base limit mentioned above.

In areas where the upper limit applies, the maximum is set based on a multiple of the median house value in the area, but there is a cap. This maximum cap in high-cost areas will be $ 822,375 in 2021, up from $ 765,600 in 2020. This is also the limit that applies in Alaska, Hawaii, Guam and the US Virgin Islands.

These limits are increasing because the Housing and Economic Recovery Act (HERA) requires Fannie and Freddie’s loan limits to adjust each year to reflect changes in house prices. Home prices increased an average of 7.42% year over year according to the FHFA Home Price Index in the third quarter, leading to these increases for 2021.

What does this mean for home buyers?

For most homebuyers, this increase in loan limits won’t change anything – although Fannie and Freddie’s decision to increase the limits so substantially reflects the fact that prices are rising year on year, which could affect the overall affordability of housing.

But for those buying homes priced between last year’s limit and this year’s limit, the impact could be significant. These borrowers will now be eligible for conforming loans, rather than jumbo loans. This could provide a greater choice of potential mortgage lenders and facilitate access to a low rate mortgage.