If you are a homeowner or have looked at buying a home in the near future, you probably know all about conforming loans. While the limits for these types of loans have remained stagnant for the past decade, steady increases in the housing marking have prompted this ceiling to rise for the first time since 2006. Beginning next year, a wider range of borrowers will now be able to access these types of loans. Rather than being limited to $417,000, conforming loans will now have an increased limit of $424,100 in 2017.
What is a Conforming Loan?
In the United States, mortgage loans are categorized based on whether they do, or do not, conform to the standards set for by Fannie Mae and Freddie Mac. One of these standards is the cost of the home. In order for a mortgage to be considered “conforming” – and be eligible for lower interest rates – it needs to be below the conforming loan limit.
Until this new change was announced for 2017, the conforming loan limit was set at $417,000 for many years. While a jump up to $424,100 isn’t an astronomical difference, it opens the homebuying door to many people who wouldn’t have otherwise been able to qualify for a lower risk, conforming loan.
If you want to buy a home that crosses this conforming limit threshold, your loan is considered non-conforming or jumbo. While these loans are certainly still available, they are considered much riskier to lenders and therefore are harder to obtain. Also, they typically involve higher down payments and a more intense scrutinization of your credit history and/or income. Because of this, they are seen more often with luxury homes, investment properties, or retail spaces.
Conforming loan limits vary by county, as it is relative to the cost of living in that area. The Federal Housing Administration is responsible for setting the national conforming loan limit (which is what will be increased for 2017), but some counties are deemed eve higher cost. As such, they have special higher limits.
In my county, for instance, the conforming loan limit is at the absolute max of $636,150 — a whopping $212,050 above the standard national limit. Then again, the cost of living where I live is astronomical (Washington, DC area) and home prices stay high, so it makes sense that certain counties are able to get higher loans. If you want to check the conforming loan limits in your own county, Bankrate has a great chart that you can view.
What Does the Increased Limit Mean for Me?
If you are looking at buying a home that was toeing the $420,000 range, this increase may mean the difference between a basic loan and a jumbo loan for you. That equates to a lower down payment, greater chance of approval, and less headache.
Planning to buy your home with a VA loan? You would be obligated to purchase within the conforming limits of your county. A jumbo loan isn’t even an option with these (and other) government-backed mortgages, so the increase may open a few extra doors while finding the home of your dreams.
Why the Increase?
It’s a great indicator of the health and growth of our country’s housing market, that the limit is rising. After the US housing crash in 2007-2008, home costs are on the rise and expected to continue to grow. This is great news for our economy and for anyone whose money is invested in real estate, whether that be their home, rental properties, REITs, etc.
While the cost of your home isn’t the only limiting factor between your mortgage being “conforming” or “non-conforming,” it’s a big part of it. Non-conforming, or jumbo, mortgages are harder to obtain and often involve more stringent credit/income guidelines, an intense application process, and higher down payments.
If you’re looking at a government-backed mortgage of any kind, you will need to stay within the conforming mortgage loan limits set forth by the FHA. Beginning in 2017, you’ll get a little extra wiggle room. Be sure to check for the actual limit in your county, especially if you live in a high cost area, and happy buying!
Have you ever had to walk away from a dream home because it would have meant a non-conforming loan?
Updated January 12, 2017 and originally published December 30, 2016.