BAM Key Details:
- According to a new analysis by Zillow Home Loans, recent updates to conforming loan limits mean over 2 million U.S. homes no longer require a jumbo loan.
- The Federal Housing Finance Agency (FHFA) increased conforming loan limits to $1,089,300 in some high-cost markets, making them more accessible to buyers.
The Federal Housing Finance Agency (FHFA) increased conforming loan limits to $1,089,300 in some high-cost U.S. markets, topping $1 million for the first time and making homes in these areas more attainable for buyers.
The increase is likely to encourage buyers at a higher price point who are hoping to avoid the added costs and restrictions that go with jumbo loans.
Conforming loans vs. jumbo loans
Jumbo loans often bring additional fees and stricter qualification standards, making them less accessible to many borrowers.
The addition of 2 million homes that now qualify for conforming loan options across the county is welcome news for home buyers entering a shopping season with fewer homes on the market. Home price appreciation has slowed significantly, and this means that homes nearing jumbo loan territory will stay eligible for conforming loans longer than we have seen in the last few years.
Compared to conforming loans—i.e., loans in amounts the mortgage company can sell conventionally to Fannie Mae or Freddie Mac—jumbo loans typically require the following:
- A higher credit score—700 vs. 620 for a conforming loan
- Bigger down payments—20% down or higher
Some also require documented proof of larger cash reserves than a conforming loan typically requires.
Who will benefit most?
The increase in the conforming loan limit to $1,089,300 for some high-cost areas means high-income borrowers in 103 counties can now borrow over $1 million without a jumbo loan.
Those 103 counties are located in the most expensive parts of the country, mainly along the coasts and in the Mountain West.
For most of the country, the FHFA increased conforming loan limits by $79,000—raising the requirement from $647,200 in 2022 to a new baseline of $726,200 in 2023.
These updates come as home sales in the second half of 2022 reflect widespread affordability challenges. Even as home price appreciation has slowed, prices are still significantly higher than they were a year ago. And between inflation and higher mortgage rates, many buyers have been sidelined or have chosen to wait on purchasing a home.
Sellers sitting on mortgage rates far below today’s going rate also have less incentive to sell, which has impacted housing supply, keeping prices up.
It doesn’t help that the number of listings that went pending in November 2022 dropped by 16.5% from the previous month—and are down by 38% compared to a year ago.
What to tell your clients and community
As an agent, when you’re working with buyers at any price point, you can help them prepare for the inevitable conversation with a mortgage lender.
Unfortunately, as a recent survey from Zillow Home Loans confirmed, prospective buyers spend almost as much time researching their next TV purchase as they do researching their mortgage lender.
So, what should you encourage them to do?
- Understand their credit profile—Encourage them to talk to their lender and use tools like NerdWallet to get a better understanding of their credit profile, since credit scores are key to their approval for a mortgage.
- Improve their credit score—Once they’re more familiar with what’s in their credit report, they can take action to pay down debts, pay bills on time more consistently, dispute any errors, and increase their credit score to improve their approval odds.
- Avoid closing any accounts—Any accounts they close are not automatically removed and will continue to show up on their credit report. Also, closing accounts raises their debt-to-credit ratio and could lower their credit score.
- Hold off on large purchases that require financing—This is not the time to make any large purchases that involve financing (cars, boats, major appliances), which would increase their debt-to-income ratio and negatively impact the size of the mortgage loan for which they can qualify.
- Determine what affordability looks like—Once they have a good grasp of their credit profile and are happy with their credit score, it’s time to get clear on how much home they can afford. Encourage them to discuss their finances with their lender and use a mortgage affordability calculator to estimate a manageable mortgage payment.
Buyers should educate themselves about loan limits in their area and speak with qualified loan officers so they are making informed choices about their home purchase and the best loan option for their personal financial situation.
The better you know what your client can comfortably afford, the more quickly you can help them find a home that fits their needs and budget. Even better if you can negotiate some concessions for them to save them even more.