This year, the Federal Housing Finance Agency (FHFA) made changes to the limit for conventional home loans. The conforming loan limit went up, with the maximum amount shifting to $726,200 for most locations in the US, and some high-cost markets have maximums that are set much higher. As a result, this essentially altered the lower level of the jumbo loan limits and may cause some lenders to make their upper jumbo loan limits higher. Along with changing the mortgage landscape, this has an impact on the real estate market. Here’s how.
How Jumbo Loan Limits Changed
Jumbo loans changed primarily since the upper limit for conforming loans increased. As a result, aspiring homebuyers can qualify for conventional loans on houses with higher values than was possible previously.
The upper limit for conforming loans primarily went up due to changes in home values across the majority of markets in the United States. Since homes are worth more than when the previous upper conforming loan limit was set, an adjustment was made to bring it in line with typical home pricing.
That’s also why conforming loan limits are higher than $726,200 in select cities or housing markets. Cities like San Francisco and New York City come with high-cost real estate markets. But since the value of properties in those areas largely remains high, conforming loans for buying in that area have a higher limit than what you’d find in lower-cost towns or markets.
The upper limit for a jumbo loan isn’t technically set in stone, and that hasn’t changed. Instead, the maximum amount a person can get with a jumbo loan is largely determined by the lender. Some lenders may set their maximums at $2 million, for example, even though that’s not required by any government agency. Others may allow borrowers to access jumbo loans in amounts of $4 million, $5 million, or even $10+ million.
Along with lenders setting upper jumbo loan limits, they also control the eligibility requirements for the loans. For example, while it’s possible to get a conforming loan with a credit score of around 620 to 640, most jumbo loans need a credit score of 700 or higher.
Additionally, debt-to-income ratio requirements may be stricter for jumbo loans. The minimum down payment needed is also usually higher than what you find with conforming loans, with a 10 to 25 percent down payment being relatively common in the jumbo loan market.
The Impact of Jumbo Loan Limits on the Real Estate Market
Generally, shifting the upper limit for conforming loans, which altered the lower limit for jumbo loans, does have a potential impact on the real estate market. Often, qualifying for conforming loans is simpler than for jumbo loans. By allowing aspiring homebuyers to get larger conforming loans, it may let some home purchasers access properties that would otherwise be hard for them to reach, which could lead to more real estate sales.
However, other factors are influencing the real estate market currently. One of the most significant is rising interest rates. When the Federal Reserve increases rates, interest rates associated with mortgages of all types typically rise. That has a significant impact on affordability. As a result, interest in buying a home has declined. Additionally, some borrowers have to explore properties that cost less than what they’d look for if interest rates were higher.
Still, the long-term impact of higher maximums for conforming loans could bolster interest in houses that were previously just above the jumbo loan limits on the lower end. As a result, even with higher interest rates, it may positively impact that part of the market, leading to more buyers and sellers within that segment.
Do you think changes to the jumbo loan limit will impact the real estate market in other ways? Do you view jumbo loans differently because of the adjustments to the limits? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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