What a way to kick off Thanksgiving weekend.
For the second year in a row, maximum mortgage limits have broken a record, officially entering the stratosphere, and heading toward the moon.
The new “conforming” loan limits for high-cost areas, including Los Angeles and Orange counties, will rise to $822,375 starting Jan. 1, a 7.4% increase over 2020’s limit of $765,600, the Federal Housing Finance Agency announced Tuesday, Nov. 24.
That means loans up to that amount can be acquired by Fannie Mae and Freddie Mac, making them eligible for lower interest rates.
For the rest of the nation, including Riverside and San Bernardino counties, conforming loan limits will increase to $548,250, up from $510,400 in 2020.
“High-balance” loans, or mortgages for amounts between $548,250 and $822,375 in high-cost areas, will be more costly than those for under $548,250, with rates about 0.25-0.5% higher plus an additional 0.25-1 point higher in loan costs.
This is the fifth straight year that the FHFA (Fan and Fred’s conservator and regulator) has increased both high-balance and conforming maximum loan limits, enabling the mortgage giants to purchase higher-balance closed loans from lenders.
You don’t have to wait until Jan. 1 to borrow the bigger bucks. Most lenders will immediately fund new loan applications based upon FHFA’s recent announcement.
Two to four units have higher loan limits, requiring larger minimum payments and coming with additional pricing charges from Fan and Fred. Accessory dwelling units, or ADU’s, are not defined as units for lending purposes.
For 2021, conforming two-unit maximum limits will be $702,000, three-unit limits $848,500 and four-units are $1,054,500.
The high-balance max for two-units will be $1,053,000, three-units will be $1,272,750, and four-units will be $1,581,750.
Loans above the conforming loan limits are considered jumbo loans and won’t be purchased by Fan or Fred.
Jumbo loans generally require a higher minimum down payment of at least 10%. Conforming loans are available with as little as 3% down, and high-balance loans are available with as little as 5% down.
Jumbo loans tend to have higher mortgage rates and more stringent loan approval rules.
What if you are seeking a higher-priced property and can’t qualify for a jumbo loan? Or what if you want to lower your payment?
A piggy-back loan might be a good option.
You put at least 10.1% down. Your first trust deed (California’s version of a mortgage) can go up to $822,375, and a second lien home equity line of credit for up to $500,000 can piggy-back on top of that. The HELOC’s, as the line of credit loans are called, would be interest-only, meaning none of your monthly payment would go to reducing the loan balance.
For example, your sales price is $1,470,000. You put 10.1% down, or $148,470. Your first trust deed is $822,375, and your piggy-back second is $499,155.
California borrowers account for about 20% of all mortgages acquired by Fannie and Freddie. Even with five straight years of loan limit increases, FHFA’s maximum loan limit increases keep Californians at a costly disadvantage.
The average California purchase loan amount increased 21.2% from 2015 to 2019 (from $436,747 to $529,173), according to mortgage data from Irvine-based Attom Data Solutions.
The average refinance loan amount increased 23.2% (from $383,431 to $474,872).
FHFA’s loan limits for both conforming and high-balance loans increased just 16.2% over that same period, from $417,000 to $484,350 for conforming loans and $625,500 to $726,525 for high-balance loans.
But real estate prices surpassed those increases in the Golden State.
Average California purchase loan amounts lagged the FHFA’s conforming loan limits by 31%, while refinances were a whopping 43% short.
The Southern California counties of Los Angeles, Orange, Riverside and San Bernardino had very similar results.
Either California borrowers are paying more for their mortgages in pricing penalties for less down payment or equity (in the case of a refinance) or more are being forced to go the jumbo loan route.
Jeff Lazerson - Mortgage Columnist since 2011