Well, it has happened again! For the third year in a row, the Federal Housing Finance Authority (FHFA) has increased the amount of money that can be borrowed through a standard home loan.
Not planning to buy soon? Please keep reading to see why this news can still be important to you.
• The standard loan limit (also known as conforming loan limit) rose by 6.9% to a maximum amount of $484,350.
$484,350 represents an increase from $453,100 in 2018.
And now, the FHFA is doing it again, increasing the loan limit from $453,100 to $484,350 for 2019.
But, as the FHFA noted earlier Tuesday, home prices are still on the rise, which necessitates a third straight yearly increase in the conforming loan limit.
The FHFA’s third quarter 2018 House Price Index report, which includes estimates for the increase in the average U.S. home value over the last four quarters, showed that home prices increased 6.9%, on average, between the third quarters of 2017 and 2018.
Therefore, the maximum conforming loan limit in 2019 will increase by the same percentage to $484,350.
In certain high cost areas, it’s even more. Loan limits will also be increasing in what the FHFA calls “high-cost areas,” where 115% of the local median home value exceeds the baseline loan limit.
Under HERA, the maximum loan limit in those “high-cost areas” is calculated as a multiple of the area median home value, while setting a “ceiling” on that limit of 150% of the baseline loan limit.
According to the FHFA, median home values “generally increased” in high-cost areas as well in 2018, which drove an increase maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $726,525, which is 150% of $484,350. Per the FHFA, special statutory provisions establish different loan limit calculations for Alaska, Hawaii, Guam and the U.S. Virgin Islands. In those areas, the baseline loan limit will be $726,525 for one-unit properties.
• The percentage increase is equal to the national appreciation average over the last year.
• Loan limits were kept high for 10 years, even as values declined. Now that the market has surpassed prior peaks, loan limits are on the rise again.
This means you may be able to:
• Purchase a higher priced home with more financing options, possibly including lower rates.
• Refinance an existing, higher-rate “jumbo” loan and possibly drop mortgage insurance premiums, too.
• Combine a 1st and 2nd mortgage
This also means you may not need a JUMBO mortgage if you are buying a home up to $485,000-500,000ish range, and there are several advantages to that, including a less stringent loan qualification process and less money down.
What’s a jumbo mortgage you ask?
Here’s a pretty good explanation from Investopedia.com:
A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). So, unlike conventional mortgages, a jumbo loan is not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications. These kinds of mortgages are gaining traction, especially as the housing market continues to recover following the Great Recession.
How Big Is a Jumbo Mortgage?
The value of a jumbo mortgage varies by state — and even county. The FHFA sets the conforming loan limit size for different areas on an annual basis, though it changes infrequently. As of October 2018, the limit was set at $453,100 for most of the country. That was a 6.8% increase from the 2017 value. For counties that have higher home values, the baseline limit was set at $679,650. Los Angeles County in California and Rockland County in New York State both have the higher baseline limit because of significantly higher home values.
The FHFA has a different set of provisions for areas outside the continental United States for loan limit calculations. So, the baseline limit for a jumbo loan in Alaska, Guam, Hawaii and the U.S. Virgin Islands as of 2018 is $679,650. That amount may actually be higher in counties that have higher home values as well.
Qualifying for a Jumbo Mortgage
If you have your sights set on a home that costs close to half a million dollars or more – and you don’t have that much sitting in a bank account – you’re probably going to require a jumbo mortgage. And if you’re trying to land one, you’ll face much more rigorous credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac. And, of course, the risk increases because there is more money involved.
Just like traditional mortgages, minimum requirements for a jumbo are increasingly stringent since 2008. To get approved, you’ll need a stellar credit score – 700 and above — and a very low debt-to-income (DTI) ratio. The DTI should be at least under 43% and preferably closer to 36%. Although they’re nonconforming mortgages, jumbos still must fall within the guidelines of what the Consumer Financial Protection Bureau considers a “qualified mortgage” — a lending system with standardized terms and rules, such as the 43% DTI.
You’ll need to prove you have accessible cash on hand to cover your payments, which are likely to be very high if you opt for a standard 30-year fixed-rate mortgage. Specific income levels and reserves depend on the size of the overall loan, but all borrowers need 30 days of pay stubs and W2 tax forms stretching back two years. If you’re self-employed, the income requirements are greater: two years of tax returns and at least 60 days of current bank statements. The borrower also needs to provable liquid assets to qualify and cash reserves equal to six months of the mortgage payments. And all applicants have to show proper documentation on all other loans held and proof of ownership of non-liquid assets, like other real estate.
How much you can ultimately borrow depends, of course, on your assets, your credit score and the value of the property you’re interested in buying. (For further information, see Too Much Debt for a Mortgage?)
Jumbo Loan Rates
On the bright side, while jumbo mortgages used to carry higher interest rates than conventional mortgages, the gap has been closing in recent years. Today, the average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages — and in some cases, actually lower. Wells Fargo charged an APR of 4.99% on a 30-year fixed rate conforming and government loan, versus 4.657% for the same term on a jumbo loan. This was was effective as of October 2018.
Even though the government-sponsored enterprises can’t handle them, jumbo loans are often securitized by other financial institutions; since these securities carry more risk, they trade at a yield premium to conventional securitized mortgages. However, this spread has been reduced, with the interest rate of the loans themselves.
Down Payment on Jumbo Loans
On the even brighter side, down payment requirements have loosened over the same time period. In the past, jumbo mortgage lenders often required home buyers to put up 30% of the residence’s purchase price (compared to 20% in conventional mortgages). Now, that figure has fallen as low as 10% to 15%. As with any mortgage, there can be various advantages to making a higher down payment – among them, to avoid the cost of private mortgage insurance. (For more, see Private Mortgage Insurance: Avoid It for These 6 Reasons.)
You could attribute all these low rates for interest and down payments to the fact that banks are generally very eager to find new customers for their jumbo loan packages. Jumbo mortgage borrowers are likely to be, or are on the road to becoming, the sort of high net worth individuals institutions love to sign up for long-term products. Such clients have an excellent credit history, plenty of assets and often need additional wealth management services. Plus, it’s more practical for a bank to administer a single $2 million mortgage than 10 $200,000 loans.
If you would like to speak to a mortgage professional about your options for purchasing a home including low down payment options and more, simply drop us a line and we’ll connect you!