Home buyers will be pleased to hear about the new jumbo loan limit for 2022. Home prices have risen dramatically over the past few years due to low mortgage-interest rates, low supply and high demand. As a result, jumbo loans have become a common method for purchasing a home, especially in higher-priced markets where homes fall over the conforming loan limit.
Due to the rise in home prices, homes in markets that were once considered affordable with past conforming loans are now nearly impossible to purchase without taking out a jumbo loan. This puts buyers in a tricky position where they have to follow stricter guidelines and face greater financial risk in order to buy a home. Luckily, buyers might have an easier time avoiding jumbo loans in the upcoming year.
Each year the Federal Housing Finance Agency (FHFA) reviews the conforming loan limits in relation to home prices changes over the past year. When home prices rise substantially, the FHFA increases the loan limits to keep up with the pricing pace. This includes loan limits for jumbo loans. In response to climbing home prices of 2021, the FHFA announced that it has set new conforming loan limits. This upcoming year is reported to be the largest loan limit increase in records dating back to 1970.
Let’s take a look into what the new jumbo loan limit for 2022 will look like and what this means for those looking to purchase a home in the upcoming year.
Conforming Loan vs. Jumbo Loan?
Conforming loans are a type of loan that conforms to the purchasing guidelines of Fannie Mae and Freddie Mac. These are two government agencies that oversee mortgage lending in the U.S. and set the conforming loan limits for borrowers.
Conforming loans make up the majority of home loans. These loans are relatively easy to be approved for as long as the home being purchased is priced under the set loan limit Because loan limits are partly based upon the median home prices, these set limits do vary across regions. Be sure to research the loan limits for your area to fully understand how much financing you can receive.
A jumbo loan is considered a non-conforming loan which means it does not conform to the purchasing guidelines set by Fanny Mae, or Freddie Mac. By definition, jumbo loans are those that exceed the conforming loan limit. These loans are often used to purchase higher-end homes or homes in more expensive markets. While jumbo loans make it possible to afford pricier homes, these loans have higher rates and stricter requirements. These requirements include:
- Credit score: While minimum credit score for a jumbo loan depends on the mortgage lender, most require a score of 700 or stronger. In comparison, conforming loans typically have a minimum between 620 and 640.
- DTI ratio: Low lower your debt-to-income ratio is the better, especially when it comes to jumbo loans. Most lenders won’t accept less than 45 percent for a jumbo loan.
- Financial strength: Your lender may ask for 2-3 years of tax returns, 4-6 recent paychecks, W-2 or 1099 forms, plus savings and bank statements. Many lenders will even ask for 6 to 12 months of cash reserves.
- Down payment: Like DTI ratio, the minimum down payment to buy a home also depends on the lender. In general, down payments for lumbo loans tend to be much higher than the traditional 20 percent down payment. If you are applying for a jumbo loan, plan to put down 20 to 30 percent if not more.
- Closing costs: Buyers can also expect higher closing costs with a jumbo loan. Closing costs for a single-family unit usually range between 3%-6% of the total home value. On a $500,000 mortgage, you can expect to pay $10,000-$25,000 in cash at the closing table.
What is the jumbo loan limit for 2022?
Jumbo loans are loans that surpass conforming loans. Therefore, we look at the conforming loan limits to the minimum price you would need for a jumbo loan limit. As you might recall, in 2021 the limits for conforming loans were set at $548,250 for a single-family home in most areas of the country. In higher-cost areas, like California and Hawaii, where home prices tend to be higher than most of the country, the limit was set at $822,375.
Going into 2022, home prices across the country continue to rise. In some areas prices have even reached record levels. In the past, loan limits have traditionally increased around $5,000 from year-to-year. Given the substantial home price growth over the past year, we will most likely see higher conforming loan limits, and therefore jumbo loan limits, for 2022.
In 2022, conforming loan limits are set at a baseline of $647,200 for a single-family home in most areas of the county. That is up over $100,000 from last year! For homes in higher-priced markets where single-family homes tend to be priced higher than average, buyers can expect a limit of $970,800. The FHFA has defined high-cost areas as places where 115% of the local median home value is more than $647,200.
What does this mean for home buyers?
This increase in loan limits offers buyers huge benefits. Because the limits are now higher, it is easier and cheaper for buyers to secure mortgage amounts above the current 2021 loan limit set by Fannie Mae and Freddie Mac. This is great news for those looking to buy in markets where the average home costs have risen into the $600-$700K range.
Because of these new conforming loan limits, standards for jumbo loans will likely be tightened even further than before. If you expect to purchase a home that may exceed the newly loan limit, prepare for stricter guidelines, larger down payment requirements, and higher rates than before. Overall, the new increased loan limit will help borrowers to stay within the conforming loan limit, and avoid having to apply for these stricter and riskier jumbo loans.
Although these higher jumbo loan limits for 2022 are a great way to encourage more buyers into the market, it is important to still be aware of the low inventory and lack of entry-level housing available. That is why it is more important than ever to have an experienced real estate agent by your side.
If you are planning on buying a home in 2022, SimpleShowing can help. Paired with one of our experienced local agents, you are sure to find a home that works for you and your loan limit. We can also help you receive thousands of dollars back at closing through our Buyer Refund incentive. Contact us today to get started!