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When you apply for a mortgage to buy a home, your loan is classified by your lender as either a "conforming loan" or a "jumbo loan." This classification can make a big difference in loan approval requirements, as well as in interest rates.
A "conforming loan" falls within loan limits set by Fannie Mae and Freddie Mac. Fannie and Freddie are government-sponsored entities (GSEs) that buy mortgages in the secondary market. The two GSEs guarantee that they will buy "conforming loans" -- but not jumbo loans.
This means banks are more eager to work with loans below Fannie and Freddie's limits, since they know there's a buyer for the loan, and they won't have to keep it on their own books. Lenders generally prefer to sell loans they make so they can in turn lend to more borrowers, since they only have so much money to lend out. Qualifying for conforming loans tends to be easier, too, as lenders who resell the loans aren't risking handling a default themselves.
Conforming loan limits rise in some years, and they'll go up in 2021. This will be the fifth year in a row that Fannie Mae and Freddie Mac have raised the limit on how much you can borrow and still qualify for a conforming loan.
Here are the new conforming loan limits for 2021
According to the Federal Housing Financing Agency, the new loan limit for conforming loans in most parts of the country is jumping up to $548,250 in 2021. This is $37,850 higher than the 2020 limit of $510,400, and is for one-unit properties.
In some parts of the country where home prices are much higher, there is a different conforming loan limit. Specifically, a higher limit applies where 115% of the local median home value exceeds the baseline limit mentioned above.
In areas where the higher limit applies, the maximum is set based on a multiple of median home value in the area, but there's a ceiling. That maximum ceiling 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 U.S. Virgin Islands.
These limits are going up because the Housing and Economic Recovery Act (HERA) requires that Fannie and Freddie's loan limits adjust annually to reflect changes in housing prices. Home prices rose an average of 7.42% year over year based on the FHFA House Price Index in the third quarter, which prompted these increases for 2021.
What does this mean for homebuyers?
For most homebuyers, this raising of the loan limits won't change anything -- although Fannie and Freddie's decision to increase the limits so substantially is reflective of the fact that prices are way up year over year, and that could affect general home affordability.
But for those who are buying homes priced between last year's limit and this year's limit, the impact could be significant. These borrowers will now qualify for conforming loans, rather than jumbo loans. This could offer a wider choice of potential mortgage lenders and make it easier to qualify for a mortgage at a low rate.