The rapid rise of home prices during the COVID-19 era is fueling what could be the biggest increase in the Fannie Mae and Freddie Mac conforming loan limit since 1970. An increase in the conforming loan limit allows home buyers wanting Fannie or Freddie-backed loans to avoid jumbo loans that are harder to get and usually have higher rates.

Some mortgage lenders in late 2021 are already selling conforming loans as high as $625,000. That is happening despite it being above the $548,000 Fannie and Freddie limits for homes in most US markets. These lenders clearly believe home prices will continue to rise through the end of 2021 and into 2022. They think they will be able to sell these larger loans to Fannie Mae and Freddie Mac when the new conforming loan limits kicks in next year.

Home prices as of October 2021 suggest that the conforming loan limit for 2022 will leap by the most ever – more than $75,000. However, percentage-wise, the increase may be less than the 16% jump in 2006.

Baseline Conforming Loan Limit Overview (Fannie and Freddie Max Loan Amounts)

The conforming loan limit for Fannie Mae and Freddie Mac is tied to the average US home price. After the housing crash of 2008 and 2009, the conforming loan limit stayed at $417,000 for many years.

But in November 2020, Fannie and Freddie increased the conforming loan limit for single family homes to $548,2500. This was a 7.5% increase based on the Federal Housing Finance Agency’s House Price Index.

In some more expensive markets, Fannie Mae and Freddie Mac can buy larger mortgages as high as a ceiling that is equal to about 150% of the conforming loan limit – $822,375.

This is the loan limit for every single-family home in Alaska and Hawaii.

The FHFA usually provides the conforming loan limit for next year in November when it releases the HPI for the 3rd quarter of the year. While the conforming loan limit isn’t released until the release of 3rd quarter data, lenders who offer conforming loans as high as $625,000 seem to be safe.

FHA’s data for the second quarter shows the index shot up almost 13% from the 3rd quarter of last year. That increase by itself would be enough to get the conforming loan limit up to $618,000.

Data for the last two months of the 3rd quarter are not released until the end of November, but home prices in July went up about 1.5%, and that is enough to raise the conforming loan limit to $627,230. The ceiling for the most expensive markets would be about $940,000.

If average home prices didn’t decrease in August through September, the new conforming loan limit for 2022 will be well above $625,000.

Lenders who are already offering conforming Freddie and Fannie loans of $625,000 are smart because they can get ahead of the game and offer loans to buyers who need to qualify for higher prices.

If you have been thinking about a Fannie Mae or Freddie Mac loan, below is more information about how to qualify.

Applying For A Fannie Mae or Freddie Mac-Backed Mortgage

The first thing to remember about these loans is that Fannie and Freddie don’t issue them – they simply back them in case of default. You still need to find a lender who sells loans backed by Fannie Mae and Freddie Mac. Fortunately, there are plenty of choices out there!

When you find a lender, you’ll need to fill out the Uniform Residential Loan Application. Then, you will need to give the mortgage lender vital information about your finances. Some of the information you will need to provide includes your bank statements, W-2s, and 1099s if you’re self-employed.

Next, you need to offer a list of your monthly debts, such as car loans, credit cards, and student loans.

Most Fannie and Freddie-backed lenders use the 28/36 standard. This means that you shouldn’t spend more than 28% of your income every  month on housing and no more than 36% on debt payments.

Fannie and Freddie usually accept up to 36% DTI but it can be as high as 45% if you have enough cash reserves and a high credit score.

If your DTI is higher than 36%, you may need to put more money down, such as 15% or 20%. However, you may be able to put down as little as 3%.

You also need to meet minimum credit score requirements to qualify for Fannie and Freddie-backed loans. Generally, you should have at least a 620-credit score for a fixed rate loan and 640 for an adjustable-rate loan.

Fannie Mae Refi Now

Another Fannie Mae program was launched in June 2021 that offers lower-income borrowers the chance to refinance when rates were as low as 2.75% for a fixed rate loan. For borrowers to qualify, they must be earning less than 80% of their area’s median income.

The idea of this program is to help more low-income homeowners refinance by making it easier to qualify with lower credit scores and income levels.

Why Consider Fannie and Freddie-Backed Loans Instead of FHA

FHA is a government organization that also backs mortgage loans. These FHA-mortgage loans are intended for people with lower credit scores but enough income to qualify.

The FHA program also is worth considering because you can get a low interest rate and put down as little as 3.5%. However, remember that the mortgage insurance for these loans is higher than Fannie and Freddie loans.

Also, you cannot cancel the mortgage insurance unless you put down 10% or more, and only in year 11. With Fannie and Freddie loans, you can cancel your mortgage insurance if you have 20% equity either with a down payment or an increase in property value.

You may want to consider Fannie and Freddie backed loans if you have a credit score above 640, but if it’s under that, an FHA loan can be a good fit.

It’s good that Fannie and Freddie have decided to raise the conforming loan limit in 2022 because home prices continue to rise throughout the country. Take advantage by contacting your Fannie Mae or Freddie Mac lender today!