If you’re in the market for a new home, you’ll need to decide what type of mortgage loan is best for you. There are many different types of mortgages available, but one of the most popular is the conventional mortgage. In this blog post, we will discuss conventional mortgage loan limits and provide tips on getting the best deal on your loan.
What Are Conventional Loans
Conventional loans are mortgages that are not backed by a government agency. They’re typically issued by banks, credit unions, and savings and loan associations. A conventional loan may have a fixed rate or an adjustable-rate. The main difference between a conventional loan and other types of mortgages is that a conventional loan isn’t insured or guaranteed by the federal government.
Conventional Home Loans Requirements
If you’re thinking of buying a home, you may be wondering if a conventional loan is the right type of mortgage for you. But you have to keep in mind that the requirements for conventional loans are quite strict. Lending institutions are concerned about how you can finance the property you are purchasing and how you will return the loan. To evaluate your credit risk, they will verify that you match the following requirements: Here are the requirements for this type of loan.
Credit Score
Typically, the credit score for a conventional mortgage is 620 and 640. Although, individuals with credit scores over 680 are ideal candidates. The higher your credit score, the more favorable your borrowing rates, terms, and total expenses will be since you will be deemed a less credit risk.
Downpayment
With a conventional loan, you’ll typically need to make at least 20% down payment. So, if you’re buying a $200,000 home, you’ll need to come up with at least $40,000. If you don’t have that much saved up, you may still be able to get a conventional loan by getting a second mortgage or taking out a home equity loan.
Insurance
Another thing to remember is that you’ll need to pay for private mortgage insurance (PMI) if you put less than 20% down. This can add hundreds of dollars to your monthly payments, so it’s something to factor into your budget.
Debt-to-Income Ratio
This Debt-to-Income (DTI) ratio compares your monthly debt liabilities to your monthly earnings. Creditors like to see debt-to-income ratios around 36%. The lower your DTI ratio, the greater your chances of acceptance. However, depending on the circumstances, some lenders may be ready to look beyond a higher DTI.
A substantial down payment, a good credit score, exceptionally large cash resources, a very high salary, or a steady, long-term employment position may affect your lender’s maximum DTI ratio.
Conventional Loan Options
There are a few different types of conventional loans that you may be eligible for, including the following:
Conforming Loan
A conforming loan is a mortgage meeting the guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac. These two organizations purchase mortgages from lenders, so they help to shape the standards for loans that are available to consumers.
Conforming loans must adhere to certain guidelines to be purchased by Fannie Mae or Freddie Mac. For example, the loan must be for a single-family home that is the borrower’s primary residence. The loan amount must also fall within certain limits, which vary by location. In high-cost areas, the limit can be higher.
The key benefit of a conforming loan is that it allows borrowers to access lower interest rates. This is because lenders see the loans as less risky since they meet certain standards. As a result, borrowers with good credit can often get conforming loans with competitive interest rates.
Jumbo Loan
A jumbo loan, also known as a non-conforming loan, is a mortgage loan that exceeds the conventional conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are available in both fixed-rate and adjustable-rate mortgage (ARM) options.
The maximum amount for a jumbo loan will vary by lender and location. In general, jumbo loans tend to have higher interest rates than conforming loans because they are not backed by the government. Jumbo loans also typically require a higher down payment than conforming loans.
Fixed-Rate Loan
A fixed-rate loan is a loan in which the interest rate stays the same for the entire term of the loan. The benefit of a fixed-rate loan is that it protects the borrower from changes in interest rates. The downside of a fixed-rate loan is that if interest rates go down, the borrower will not be able to benefit from the lower rates.
Portfolio Loan
A portfolio loan is a type of loan that is not sold on the secondary market. Instead, the lender keeps the loan in their own portfolio. Portfolio loans are usually made by smaller banks or credit unions that don’t have the same access to the secondary market as larger institutions. This means that portfolio loans may be more expensive and harder to get than other types of loans.
To know more about these types of loans, you can visit sites like https://mortgage.shop/conventional-mortgage-loans/ and others like it.
Conventional Mortgage Loan Limits Explained
Most conventional loans comply with Federal Housing Finance Agency (FHFA) regulations. The FHFA adjusts its conventional mortgage loan limits annually depending on its House Price Index (HPI) report. This report analyzes the average annual growth in house prices. The FHFA establishes limits based on the region’s median house price. Therefore, there are significant differences even in the same region.
For instance, a property in Los Angeles qualifies for a conventional loan with a higher interest rate than a home in northern California. This is because housing prices in these places vary.
The FHFA establishes loan restrictions yearly, so as house values increase, so will the limitations.
In 2022, the standard-conforming mortgage loan ceiling is $647,200. In counties where the typical home price surpasses this amount, the conforming loan maximum might be as high as $970,800. But it still depends on the county limit.
According to the FHFA House Price Index, property prices increased an average of 7.42 percent between 2019 and 2020. Consequently, the conforming loan ceiling increased by 7.42 percent between 2020 and 2021. Due to the substantial growth in property prices in 2021, the FHFA boosted the conforming loan ceiling by more than 18 percent for 2022.
Conventional Mortgage Loan Limits In High-Cost Regions
The cost of a home varies considerably from state to state. It can even vary from county to county. This makes it impossible to have a single loan limit for the nation. Indeed, it isn’t easy to compare property prices in rural Pennsylvania to those in Brooklyn.
For this reason, the FHFA sets a greater restriction for ‘high-cost’ locations. This is a categorization based on a region’s median house value compared to the conventional loan limit.
Considering the typical house value in a specific location, the conventional loan limit might increase up to 150% of the base limit. The cap for 2022 is $970,800.
What You Should Consider Before Borrowing Above The Loan Limit
If you are thinking about acquiring a property that exceeds the conventional mortgage loan limitations, you must determine if you can afford a jumbo loan and what this sort of loan will require on your budget. Remember that the bigger the loan amount, the greater the monthly payment.
What impact might a non-conforming loan have on your finances? For many debtors, the initial fee might be excessive on its own. Most applicants for jumbo loans are required to make a minimum 20% down payment. In addition, they must have a credit rating above 700 and a DTI of 45% or less to qualify.
If you match these criteria, a jumbo loan might be advantageous. But before you begin the process of purchasing a house, you should be aware of the lending restrictions in your region and the implications of a loan on your financial circumstances.
Final Note
If you want to purchase a house with a conventional mortgage loan, you should be aware of your county’s loan limits. While alternative types of loans, like jumbo loans, might eliminate the restriction of sticking within a set price range, doing so entails forgoing the advantages of a conforming loan.