The Federal Housing Finance Agency (FHFA) has announced new 2022 conforming loan limits for conventional loans. The baseline conforming loan limit for 2022 will be $647,200, up $98,950 from 2021's limit of $548,250. That is a record-high increase of 18% based on the FHFA House Price Index.
In higher-cost areas, the new loan limit increases to $970,800, or 150% of the baseline loan limit. This ceiling applies to residents of Alaska, Hawaii, Guam and the U.S. Virgin Islands, as well as areas in which 115% of the local median home value exceeds the baseline conforming loan limit.
Mortgage loans above these limits are considered non-conforming loans, or jumbo loans. If your loan amount qualifies to be a jumbo loan, you may face stricter underwriting criteria, such as higher credit score and down payment requirements.
Why Understanding Conforming Loan Limits Is Important
As a real estate investor, understanding the conforming loan limits each year may help you allocate capital more strategically. To make the most amount of money, you want to invest in real estate where there is the most demand. Therefore, the most amount of real estate demand should be up to the conforming loan limits plus a down payment percentage.
In other words, given the baseline conforming loan limit for 2022 is $647,200, we can assume with high certainty that single-family homes priced up to $647,200 will get the most favorable mortgage rates. If we assume a 20 percent down payment, we can estimate that almost all homes priced up to $809,000 will receive the most favorable mortgage rates.
For higher-cost areas, the most amount of demand will be for homes between $970,800 to $1,213,500. Of course, as we get to the upper bands of $809,000 and $1,213,500, demand will decline slightly as not everybody is able to put down 20%.
Strategically, for 2022, you would then peruse Zillow or Redfin or the various real estate crowdfunding platforms for opportunities up to $809,000 and up to $1,213,500, depending on the area.
How Much Cheaper Are Conforming Loans Versus Non-conforming Loans?
Based on my experience with mortgages since 2005, I've observed conforming loans generally tend to be around 0.25% cheaper than non-conforming loans on average. The percentage difference is not large. However, if you need to get a non-conforming loan in a high-cost city like San Francisco, the absolute dollar amount may be significant.
For example, if you took out a $1,500,000 non-conforming loan, it would cost $204 more a month at 3.25% than at 3%. At 3.375%, the increase would be $307 more a month compared to a mortgage at 3%.
The reason why rates for conforming loans tend to be cheaper than non-conforming loans is due to Freddie Mac and Fannie Mae. Fannie Mac and Fannie Mae are federally backed home mortgage companies created by the United States Congress. They back about half of all US mortgages and are not lenders. Instead, they are buyers of conforming loans from lenders and resell them to investors.
The actions of Freddie Mac and Fannie Mae makes loans cheaper for lenders because it enables lenders to de-risk and lends out more money.
Think of yourself as a lender. Let's say you lend $100 to Slim Shady at a 10% interest rate for one year. $100 is all the money you have in the world. Instead of waiting for 12 months to get $110 back, you can sell your loan to Freddie Mac for $106. In this way, you pocket a $6 profit and get to lend out your money again for potentially more profit.
Thanks to Freddie Mac, you might even charge a lower interest rate of 9% because you've got the government's backing. The system works until you lend out too much money to too many unscrupulous borrowers who don't pay you back.
Conforming Loan Requirements
Homebuyers using conforming loans generally have to meet the following requirements:
- Minimum credit score: 620
- Maximum loan limits: $647,200 and $970,800 for higher-cost areas for 2022
- Maximum debt-to-income ratio: 43%
- Minimum down payment required: At least 3%
You can certainly buy a much more expensive house than the maximum conforming loan limits if you have a larger mortgage. You just can't get a conforming loan with the likely lower rate beyond the maximum loan limits.
By categorizing higher-balance loans as conforming, more homebuyers can qualify for loans that are typically less expensive, require smaller down payments and allow for lower credit scores.
Non-conforming Loan Requirements (Jumbo Loans)
When people think of a non-conforming loan, they often think of loans that are greater than the conforming loan limits, hence, the term “jumbo loans.” However, that's not always the case.
A non-conforming loan is simply any mortgage that doesn’t conform to the requirements set forth by Fannie Mae and Freddie Mac. Non-conforming loans also include government-backed loans like VA loans, FHA loans or USDA loans.
Here are some general requirements to qualify for a non-conforming loan:
- Minimum credit score: 580 (but there really are few lenders who would lend at this low level)
- Maximum loan limits: Varies by program and lender
- Maximum debt-to-income ratio: Varies by program and lender
- Minimum down payment required: Varies by program and lender, but you may be more likely to be approved with a down payment of at least 20%
Why Non-Conforming Loan Rates Are Sometimes Lower
There have been a couple of incidences during my 18-year mortgage borrowing experience where non-conforming loan rates have been lower. These situations occur when the lenders may be hungry for more business. As a result, lenders may take more risk by lowering interest rates for borrowers.
Non-conforming loan rates are sometimes lower than conforming loan rates. This anomaly happens when there is government dysfunction or limits to what Freddie Mac and Fannie Mae can purchase. In recent years, we've seen the government provide unlimited financial resources to combat downturns. However, this was not always the case. For example, we saw indecisiveness during the initial months of the 2008-2009 Global Financial Crisis.
What Do Higher Conforming Loan Limits Mean For The Housing Market?
Higher conforming loan limits mean higher incremental demand for housing in 2022. More people can afford more affordable mortgages. Only needing to put down 3% to qualify for a conforming loan also brings in much more capital. A 20% down payment to qualify for a non-conforming loan may simply be too much for some.
For the self-employed, conforming loans also allow for more flexibility when it comes to income requirements. Usually, without at least two years of solid 1099 or self-employed income, you will unlikely qualify for any type of mortgage loan. However, self-employed people can now get a waiver to only provide the most recent year's tax return, instead of two in 2022.
Raising the conforming loan limit by 18% is another sign the government is on the side of homeowners. Therefore, in the long run, just like how it's not wise to bet against the Federal Reserve by shorting stocks, it's probably unwise to bet against the Federal Housing Finance Agency by renting.
The government knows most Americans own homes. Further, most of a typical homeowner's net worth is made up of their primary residence. Hence, the government would be foolish not to remain accommodative with the changing times.
Invest In Real Estate More Surgically
The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term. Negative real mortgage rates also makes investing in real estate very attractive.
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Readers, what do you think about the huge jump in conforming loan limits for 2022? Do you think this is healthy for the real estate market and society overall? How are you using higher conforming loan limits to your advantage?