How Mortgage Limits Are Determined Every Year
As discussed in a previous First Savings Bank Mortgage article, conforming mortgages are those that meet the standards set by the Federal Housing Finance Agency (FHFA) and by the largest mortgage underwriters in the country, Fannie Mae and Freddie Mac.
The limits set for conforming loans are determined annually on the basis of several criteria, but the most important is data reported by The Federal Housing Finance Agency House Price Index (FHFA HPI®), which tracks changing prices in the housing market.
As every lender and broker today is well aware, housing prices are at historic highs. The House Price Index reported an 18.05% increase in the third quarter of 2021 — and that figure was used to adjust the conforming loan limit (CLL). Ergo, the largest secured and conforming loan for a single unit home in a typical part of the country was raised 18.05% from $548,250 in 2021 to $647,200 in 2022.
High-cost counties where 115% of the local median home value exceeds the baseline conforming loan limit — as well as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, which are statutorily deemed high-cost areas regardless of actual home prices — can have an increased CLL (up to 150% higher, which they met for 2022). The CLL for single-unit homes in high-cost regions increased from $822,375 in 2021 to $970,800 in 2022.
Fannie Mae and Freddie Mac set these limits because they are designed to underwrite a very large number of homes and thus set standards that enable them to spread the risk they can shoulder as widely as possible. That said, lenders like First Savings Bank Mortgage set our own internal limits based on the risk we are willing to accept.
Every potential borrower has a maximum loan amount or loan limit that can be authorized by a lender to borrow. That figure is based on several factors that change annually, including changes in the housing market and changes in the hopeful borrower’s financial status and needs, including:
- Credit ratings and histories
- Loan lengths
- Debt-to-income ratios
- Financial profiles
Figures vary by lender and by year, but right now a debt-to-income ratio of 36% or less is generally considered acceptable. Government-backed loans (e.g. Federal Housing Administration, Veterans Benefits Administration, or U.S. Department of Agriculture loans) accept higher debt-to-income ratios, often up to 50%, as do some lenders including First Savings Bank Mortgage for highly qualified borrowers.
Mortgage lenders also adjust their loan limits according to optimized loan-to-value evaluations. Typically a lender will lend no more than 70-90% of a secured asset’s value as collateral. Additionally, mortgage lenders consider the borrower’s housing expenses when setting loan limits, such as:
- Mortgage principal and interest payments
- Property taxes
- Hazard insurance
- Principal mortgage insurance (PMI)
- Homeowners association fees
The PITI (the combined amount of monthly payments for the mortgage principal and interest plus all taxes, insurance, and fees associated with the property) is a major factor in setting loan limits. There is a fairly well established guideline in the mortgage industry called the 28/36 rule that helps lenders set their limits. The rule prioritizes borrowers with maximum household expenses that are at or below either 28% of their gross income and those with a total household debt that is at or below 36% of their gross monthly income.
Jumbo Loans and Piggyback Financing
Many applicants, particularly in the current housing market where record high prices are common, despite excellent credit histories, sufficient income, and a lack of significant debts or expenses will still be unable to purchase the home they want with just a conforming loan.
First Savings Bank Mortgage offers jumbo loans up to $5 million for these borrowers. Many borrowers (and even some brokers) incorrectly assume that loans of that size, which cannot be underwritten by Fannie Mae or Freddie Mac, must necessarily have very high interest rates to account for the elevated risk they pose.
To the contrary, many non-conforming jumbo loans are available at rates that are at or even below that of conforming loans. However, they do typically require more stringent borrower criteria, such as higher credit scores (usually 700 and up) and larger down payments (usually at least 10-20%).
Borrowers applying for a jumbo loan that don’t make a down payment of at least 20% virtually always have to pay for private mortgage insurance, but there is a workaround that can save them that cost called piggyback financing or an 80/10/10 loan. Instead of one loan, they can take out a first mortgage for 80% of the cost of the home, a second mortgage in the form of a HELOC (home equity line of credit) for 10% of the cost, and then put 10% down.
Limits Change as the Market Changes
As prices in the housing market fluctuate and lenders adjust their own risk profiles, maximum lending limits rise and fall. Right now, the economy is in a strong position, borrowers have tremendous buying power, the housing market is red hot, and lenders are empowered to offer substantial loans to a large segment of the market.
2022 is predicted to experience a minor cooling off, but not enough to slow the growth in the housing market substantially.
FSB Mortgage, First Savings Bank’s third-party originating division, is a new kind of wholesale and correspondent lender that offers a superior lending experience. Contact us today to learn more.