By Neena Vlamis, President of A and N Mortgage

Owning a home is part of the American dream, but the processes and paperwork can be overwhelming. One area that challenges most home buyers are the mortgage loan limits.

The Federal Housing Finance Agency (FHFA) has announced new loan limits for 2021 that reflect the average increase in house price index data. This article will provide a general overview of these new loan limits and how they affect your home purchase decisions in the foreseeable future.

What is an FHA Loan?

The FHA insures mortgages, it doesn’t lend any money itself but gives government backing to lenders. An FHA loan is a reasonable lending option for homebuyers who may not be able to access conventional mortgages, either because of lower income or credit scores.

If you are looking to buy your first home, an FHA loan is an excellent solution. Down payments and interest rates are lower than conventional mortgages. However, you can only borrow within the loan limits announced by the FHA for the year you intend to buy your property, and those limits vary according to location.

Significant advantages of an FHA loan are:

An FHA loan is much easier to qualify for because the government insures the loan.
Lenders have security cover in case of a default, so they are more willing to allow greater mortgage access.
You should expect to commit a small down payment of about 3.5% for the FHA loans, and the interest rates are competitive depending on the lender.

One limitation of the FHA loans is that they limit your purchase to a four-unit property. If you are looking to purchase a larger home, you would need to qualify for a conventional mortgage which requires a higher credit score and larger down payment.

For 2021, the FHA loan limits in Cook County are:

1-unit: $379,500
2-unit: $485,800
3-unit: $587,250
4-unit: $729,800
What Is A Conforming Loan?

This is a home loan that complies with the underwriting rules of Fannie Mae and Freddie Mac. Conforming loans can also sell on the secondary mortgage market that connects lenders to investors to keep mortgage rates in check.

Most U.S. home loans are conforming loans, but a non-conforming loan such as a jumbo loan exceeds the national baseline limits. Conforming loans are most beneficial for homebuyers with excellent credit scores as they typically offer lower interest rates to borrowers which can result in lower monthly payments.

For 2021, the conforming loan limit for one-unit properties increased to $548,250 from $510,400. If you want to own a home in a high-cost market area, such as San Francisco, New York City, or Washington D.C., you may find that the limits are higher.

The loan limit in higher-priced locations typically goes 150% higher than the national average limit. The new conforming loan limits are an average of home price appreciation in the U.S. between November 2019 and November 2020.

For 2021, conforming loan limits for Cook County are:

1-unit: $548,250
2-unit: $702,000
3-unit: $848,500
4-unit: $1,054,500
Since limits for conforming mortgages vary considerably based on location, check your local FHFA county limit to determine what you’ll be able to borrow in 2021.

Why Did the Mortgage Loan Limits Increase?

Loan limits increased because the home prices across the U.S. are rising too. A booming real estate market is usually a great indicator of the economy’s health, and the last five months of 2020 registered rising home prices.

However, higher real estate values mean those home buyers would need to borrow more for their mortgages. In many cases, those with lower credit scores or without enough funds for a down payment are locked out of the property market altogether.

Loan limits are also required to change every year by law under the Housing and Economic Recovery Act (HERA). Price adjustments must match the changes in the average price of a home in the U.S. to make mortgages accessible to all Americans, especially those who may not qualify for a conventional loan.

Financing a home can be challenging, so many lenders avoid risk as much as possible. However, the FHA steps in to give more security to lenders and more accessible loan terms for buyers in challenging financial situations.

Loan limits have been rising year after year, and investors should expect them to continue to do so, but this should not discourage you from going for your dream home. With the right mortgage lender, you can explore different investment options and interest rates to find the best property in your area.

How Does the Increased Limit Impact Borrowers?

The increased FHA and conforming loan limits have some significant implications for borrowers.

First, it might require you to consider buying property in a different location than you had expected. Areas with lower home prices will have lower loan limits, so if this year’s increase has altered your budget, it may help to look at different counties or ZIP codes where your savings will get you the right home.

Next, it may mean that you delay your property purchase if the loan limit can buy you a better property than you expected. A higher limit means you can borrow more for your mortgage and actually get a home in a better neighborhood if you can raise the down payment and work on your credit score.

If the loan limit for your area has changed and relocating isn’t an option, a jumbo loan is the next best option. A jumbo loan will allow you to borrow above the loan limit. However, it has different guidelines that are tougher to meet than a conforming loan, such as a larger down payment, tighter repayment terms, property appraisals, and reserve assets.

At the same time, FHA loan limits influence the timing of your purchase decision. Suppose you were looking to purchase a property at the end of any given year. Then it is advisable to wait until the annual FHA announcement in December and the price determination on January 1 of the coming year. This can open up opportunities to buy better properties when loan limits are higher.

Keep in mind that there are other factors that determine whether you can qualify for an FHA loan. Apart from the loan limit, your FHA lender will consider;

  • Your debt-to-income ratio
  • Down payment
  • Credit score, as well as other qualifications

A savvy home buyer should be aware of every element that goes into their home purchase decision and get advice from a reputable real estate agent.

How Are Loan Limits Calculated?

The FHFA uses the House Price Index to set loan limits for the new year. However, if home prices increase by a certain percentage annually, the FHA and conforming loan limit will increase by the same percentage.

Between the third quarters of 2019 and 2020, home prices increased by 7.42%, and the baseline conforming loan limit increased by the same 7.42%. Property prices typically rise between 5% and 10% annually depending on the state of the economy. FHFA uses these records to adjust its loan limits accordingly.

A high-cost area is one where the housing prices are 115% higher than the baseline loan limit across the country. Despite this, the FHA loan limits are higher but still capped at 150% of the baseline conforming limit in other housing markets.

This means that for 2021, the maximum loan limit for high-cost housing markets will be 150% of $548,250, which is $822,375. Therefore, the “floor” for FHA loans is 65%, while the “ceiling” is 150% of the average property value. Any location where the loan limit is greater than the “floor” is considered a high-cost area.

The other differences are evident in areas such as the type of property, but generally, the above figures are for single unit houses. If you are looking to buy a two-unit, three-unit, or four-unit property, the limits will increase as well.

Residents of Alaska, Guam, the U.S. Virgin Islands, and Hawaii calculate their loan limits differently. The baseline limit for a single unit property in these locations is $765,600, and unique differences in each area can drive up the limit.

Reach Out to A and N Mortgage Today

Talk to us when you are ready to buy your dream home, refinance a loan, or simply need expert advice from a reputable mortgage banker to buy a property. A and N Mortgage is here for you.

We can guide you through the application process and see your application through the qualification for mortgage loans. We will also show you how to calculate your mortgage accurately, get faster approval and have a stress-free home buying process.

Do you have any questions about the new loan limits in 2021? Contact us today.

A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.

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