What used to be considered a jumbo loan may now become the norm. The Biden administration and the Federal Housing Association just released the new mortgage loan limits on single-family homes for 2022, and it will be the largest one-year increase in our country's history. The 18% increase has raised the limit of conforming loans by up to $148,425 depending on location and has set the bar for first-time homebuyers to nearly one million dollars in certain counties.
How is the loan limit set?
This loan limit is based on the House Price Index (HPI) report, which takes into account average housing prices by county in comparison to the average prices across the country. It is a weighted, repeat-sales index that takes into account the average price changes in repeat sales or refinancings on the same properties going back to 1975. When sales prices increase, the Federal Housing Association will increase the next year's loan maximums so that FHA mortgages or refinancing offered by Fannie Mae and Freddie Mac remain accessible and competitive.
What are the 2022 loan limits?
The vast majority of the country has a new conforming loan limit of $647,200. This represents an 18% increase from 2021's loan limits and is the largest jump ever. If you live in an expensive county, your mortgage limit is allowed to be higher than counties that are considered average or below average. High-cost areas can allow for higher loan limits with a ceiling of up to 150% of the baseline limit. Counties in California, New York, New Jersey, Alaska, Hawaii, the D.C. metro area, and even the Florida Keys will have new loan limits in place up to $970,800. That means that someone with a credit score of just 580 and a debt-to-income ratio of less than 43% can be approved for a loan just shy of one million dollars with 3.5% down.
How do the loan limits impact buyers?
What came first, the chicken or the egg? In this case, we know that the housing prices initiated the increase in mortgage limits, but it begs the question as to whether it will further support or perhaps even fuel the soaring home prices further. An FHA loan does require that the borrower resides in the home, so the new limits won't impact real estate investors directly. But it could expand the market -- and thus competition -- dramatically for buyers at this higher price point.
Keep in mind that these limits are maximums and that the mortgage that is taken on still must be paid back. That means the borrower will need to have sufficient income to support the payments in addition to their other financial obligations like car payments, utilities, and groceries. Maxing out offers up to allowable limits just to get in a house could set the stage for unsustainable payments, leaving overextended buyers in quite the predicament. Time will tell how this plays out, but for now, it's safe to say that buyers will now have cheap, easy access to more money than ever before.