New Conventional Loan Limits for 2022

What do you know about acquiring a conventional loan? Read some basic tips for how these loans work via this short analysis.

If you’re thinking about buying a house, you’re likely all too familiar with the fact that home prices have been rising dramatically since the outbreak of the coronavirus pandemic. A number of different factors came together to create this outcome, including low inventory, low mortgage rates, and the lifestyle changes that people made in reaction to the virus.

As home prices go up, it means that individuals need to borrow larger sums of money to finance their property purchase. However, the federal government controls how much money people can borrow for home loans through one of the simplest methods: conforming loans.

In 2022, the FHFA raised the conforming conventional loan limits by a whopping 18%. What does this mean for you as a home buyer? Why did the conventional loan limits increase by such a large percentage?

Let’s dive in and take a look at what you need to know.

What Is a Conventional Loan?

When you take out a conventional loan to finance the purchase of real estate, it means that the loan isn’t insured or guaranteed by the federal government. Most conventional mortgages qualify as being “conforming.” What this means is that they are eligible to be sold to either Freddie Mac or Fannie Mae. This is important because conforming loans offer traditionally the best mortgage rates and terms.

Freddie Mac and Fannie Mae are enterprises that are sponsored by the government. This allows lenders to offer low down payment options that would not be available without sponsorship from the government. What this does is allows lenders to loan more money to other qualified buyers by freeing up their funds.

There are also some conventional loans that are considered non-conforming. What this means is that they don’t meet the guidelines to be sold to Fannie Mae or Freddie Mac. One of the most well-known of these types of loans are jumbo loans, which are loans for an amount beyond the conforming loan limits. These loans traditionally have higher rates due to the cost of borrowing being higher for investors, due to not have government sponsorship.

What Are the Conventional Loan Limits for 2022?

Before we discuss what, the conforming loan limits are for 2022, let’s talk about what this limit means. Basically, the Federal Housing Finance Agency (FHFA) sets a limit for the maximum loan amount that buyers can borrow using a conventional loan. If a buyer wants to borrow more money than this from a lender, they will need to take out a jumbo loan which is a type of non-conforming loan.

The conforming loan limit for 2022 increased an impressive 18% from 2021, the greatest increase in history. While the loan limit had been $548,250 in 2021, the limit for 2022 is now $647,200.  This huge increase was due to the premonition the government has that home prices will continue to rise in 2022.  Higher prices means higher loan amounts.

This limit is determined each year by the FHFA using the Q3 House Price Index. As home values have been going through the roof in the last two years, it isn’t entirely surprising that there would be such a big jump in the conventional loan limits.

It’s worth noting, though, that there are some exceptions to the conforming loan limits. While there is a federal standard put in place, the limits are higher in certain places where the cost of living is higher and the market is more expensive. For example, the new limits for New York City, California, D.C., and Hawai’i are higher than the standard conventional loan limits.

The highest of these exceptional limits for 2022 is $970,800. Last year, the highest of these exceptional HCOL conventional loan limits was $822,375.

How Do the New Conventional Loan Limits Impact You?

Many people that were trying to buy a house with a conventional loan in the last few years were priced out of the market because of quickly rising home prices. This means that homebuyers either needed to opt for jumbo loans, increase their down payments, or wait until later to buy.

Getting a jumbo loan can be more expensive, more complicated, and more difficult to qualify for. This means that the need to get a jumbo loan can make becoming a homeowner less attainable.

With the FHFA increasing the conforming loan limits so substantially, this means that more buyers will be able to be competitive in the market. More people will be able to purchase houses without needing to increase their down payments or apply for more complicated loans.

What Are the Potential Negative Implications of the Loan Limit Increase?

While it seems like it is largely a good thing that the conventional loan limits have increased, it also does have some potentially negative implications. The most prominent of which is that having such a big rise in loan limits could add fuel to the fire in terms of rising home prices. For buyers that are already feeling the heat when it comes to the increased cost of housing, this could be disappointing news.

That being said, increased loan limits haven’t historically always led to increased home values.

(Are you wondering which housing markets you should consider investing in for 2022? Check out this article to learn more!)

Are You Shopping Around for a Conventional Loan?

If you’ve been feeling stressed by rising home prices, you might be glad to hear that the FHFA has raised the conforming conventional loan limits. Because of the increase to these limits, it means that you might not be restricted in the type of home you can buy in a way you could have been last year.  As a first time homebuyer can now purchase almost a $700,000 home with just 3% down!

Are you ready to apply for a conventional loan for your dream home? Are you pursuing a jumbo loan for the house you’ve always wanted? Either way, you’ve come to the right place.

At Modern Lending, our All-Star Mortgage Team is here to help you find the funds you need to buy your next home. If it’s time for you to apply for a loan, click here.