What are loan limits?
A conforming mortgage limit or a conforming loan limit is simply the maximum amount a loan can be to meet the requirements set forth by government-backed agencies like Fannie Mae and Freddie Mac. In other words, if your loan exceeds these limits, you will not be eligible for common government-backed loans like FHA, conventional mortgages and others.
In Michigan, conforming loan limits in 2019 were set at $484,850 and any loan that exceeds these limits is considered a jumbo mortgage, or super jumbo mortgage depending on the amount. While each case is unique, often mortgage rates for jumbo mortgages are typically higher than government-backed mortgages and/or they require larger down payments.
However, in 2020, the Federal Housing Finance Agency (FHFA) announced will be increasing the mortgage loan limits to $510,400, meaning buyers looking to purchase a home in the $500,000 range may have more loan options available to them now. Additionally, homeowners who purchased a home priced over $484,850 but under $510,400 may benefit from refinancing to a conventional mortgage in order to enjoy the benefit of a lower monthly mortgage rate.
3 Questions to Ask Yourself
If your desired home price point is right around the $500,000 mark, it is critical that you fully understand all of your options. In some cases, it may be more advantageous to find a home under the limit, although this isn’t always the case. Here are some questions you should ask yourself:
How much house can I afford?
Your income, down payment, credit history and other factors need to be analyzed by a mortgage professional in order to understand just how much you can afford. In some cases you might be able to move beyond the loan limits into a jumbo mortgage, but you should work with a mortgage advisor to help you make that decision.
What are the pros and cons of staying under the loan limits?
While you may benefit from a lower monthly mortgage payment or lower interest rate, you become limited in your home selection in that you must find a home at or under the $510,400 limit set for 2020. Either way, find out what the pros and cons are from a mortgage advisor.
Do I plan on staying in the home long term?
Time is one of the greatest assets when it comes to real estate. Whether you purchase a home above or below the set loan limit, the reality is the market is always changing. A drop in rates or another increase in loan limits could benefit you by presenting an opportunity to refinance and bring your monthly payment down.
The Bottom Line About Loan Limits
Loan limits were set up by the government to help regulate the real estate market, especially for larger, more expensive homes which often have more risk associated with them. While the real estate market is impacted by many variables, it is important for you as a buyer and homeowner to understand what loan limits mean for your particular situation. Work with a mortgage expert that can advise you and help you see actual numbers on how going above or below loan limits impacts your particular mortgage application.