Mortgage lenders prematurely raise government-backed loan limits, increasing loan amounts for homebuyers

Mortgage lenders across the U.S. are raising their conventional loan maximums ahead of the FHFA’s official announcement.  (iStock)

Every November, the Federal Housing Finance Agency (FHFA) sets new conforming loan limits for the year ahead, giving the loan amount limits at which homebuyers can get conventional loan financing. But this year, many lenders are jumping the gun, raising their limits early before the FHFA makes its announcement. 

Last year, the FHFA set loan limits to $548,250 for most of the U.S., up from $510,400 the year before. High-cost areas are allowed higher conventional loan limits of 150% of the traditional limit, setting high-cost regions such as Alaska or Hawaii at $822,375 in 2021.

However, many lenders began setting new limits in October by measuring home price increases in 2021 and making their own estimates about what limits the FHFA will set. For example, Geneva Financial Home Loans, Caliber Home Loans, PennyMac and United Wholesale Mortgage (UWM), some of the largest mortgage lenders in the U.S., increased their conventional loan limits to a maximum amount of $625,000. 

If you are interested in purchasing a home, you could get a higher mortgage loan amount at lower interest rates through a conventional loan. Visit Credible to input your information and find your personalized rate without affecting your credit score.

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When UWM announced it would raise loan limits ahead of the FHFA’s November announcement, the lender explained the move will allow mortgage brokers to get borrowers into higher loan amounts for better pricing as home prices surge. Other lenders expressed similar sentiments.

"By raising loan limits on conventional loans, we are able to further support our customers during a competitive housing market while rates are still low," Caliber CEO Sanjiv Das said. "Jumbo loans are not feasible options for everyone, and higher conforming loan limits can help certain borrowers trying to purchase a home or access liquidity."

To get a conventional loan, borrowers typically must have at least a 3% down payment for first-time homebuyers or 5% for other buyers with at least a 620 credit score for a single-family home. Conventional loans have more allowances compared to others, like FHA mortgages. For example, borrowers do not need to pay private mortgage insurance (PMI) once they have at least 20% equity in the home. 

If you are interested in taking out a mortgage as loan limits increase, visit Credible to compare multiple lenders at once and choose the option that is the best fit for you.

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Economist says lenders aren’t taking on much risk by acting early

Because mortgage lenders are increasing their lending limits before the FHFA announcement, they are taking on more risk in the mortgage market. If the agency doesn’t raise rates as much as lenders are anticipating, lenders will be unable to sell their loans to be backed by Fannie Mae and Freddie Mac. 

"The trick is that the home price index that we use to do the calculations is not one that's updated on a monthly basis," said Mike Fratantoni, Mortgage Bankers Association (MBA) chief economist and senior vice president of research. "I don't have any reason to think it's going to necessarily be a lot lower, it could be somewhat lower."

However, Fratantoni said that the 15% increase lenders are giving is more conservative, adding that the jumbo loan market has been strong. If lenders cannot sell some loans to the GSEs because the FHFA doesn’t raise the conforming loan limit as much as lenders expect, it's likely that they will sell the mortgages to private investors. 

"It’s probably not a huge risk, and it's certainly one that has some happy customers," Fratantoni said. "I think by moving early – it’s a bet. We'll see how it works out and also we’ll see how many others follow behind. It's a competitive market." 

If you are interested in getting a mortgage, visit Credible to speak to a home loan expert and get all of your questions answered. 

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