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If you are looking for a mortgage To buy a home, your loan will be classified by your lender as either a “Compliant Loan” or a “Jumbo Loan”. This classification can make a huge difference in loan approval requirements as well as interest rates.
A “Compliant Loan” falls under the loan limits set by Fannie Mae and Freddie Mac. Fannie and Freddie are government sponsored companies (GSEs) that buy mortgages in the secondary market. The two GSEs guarantee that they will buy “Compliant Loans” – but not Jumbo Loans.
This means banks are more willing to work with loans that are below Fannie and Freddie’s lines, knowing that there is a buyer for the loan and not having to keep it on their own books. Lenders generally prefer to sell the loans they make so that, in turn, they can lend more borrowers since they only have so much money to borrow. Qualifying for compliant loans is also usually easier because lenders who resell the loans do not risk dealing with a default themselves.
Compliant credit limits will increase in a few years and will increase in 2021. This is the fifth year in a row that Fannie Mae and Freddie Mac have raised the borrowing limit and still qualify for a compliant loan.
Here are the new compliant credit limits for 2021
According to the Federal Office for Housing FinancingThe new credit limit for compliant loans in most parts of the country will rise to $ 548,250 in 2021. This is $ 37,850 higher than the 2020 limit of $ 510,400 and applies to one-unit properties.
There is a different compliant credit limit in some parts of the country where home prices are much higher. In particular, a higher limit applies if 115% of the local mean house value exceeds the base limit mentioned above.
In areas where the cap applies, the maximum is set based on a multiple of the mean house value in the area, but there is an upper limit. This maximum cap in high-cost areas is $ 822,375 in 2021, down from $ 765,600 in 2020. This is also the limit in Alaska, Hawaii, Guam, and the US Virgin Islands.
These limits are rising because the Housing and Economic Recovery Act (HERA) requires Fannie and Freddie’s credit limits to be adjusted annually to reflect changes in house prices. House prices rose an average of 7.42% year-over-year based on the FHFA House Price Index in the third quarter, leading to these increases for 2021.
What does this mean for homebuyers?
For most homebuyers, this increase in credit limits isn’t going to change anything – although Fannie and Freddie’s decision to increase the limits so much reflects the fact that The prices are way up Year after year, and that could hurt overall home affordability.
But for those buying homes priced between last year’s and this year’s limits, the impact could be significant. These borrowers now qualify for compliant loans instead of jumbo loans. This could provide more choice of potential mortgage lenders and make it easier to qualify for a mortgage with a low rate.