What mortgage borrowers need to know
If you are shopping for a mortgage loan, you may come across the term “compliant loan”. If you are not sure what it is, don’t worry.
A compliant loan is a loan backed by Fannie Mae and Freddie Mac, the two government-sponsored entities that buy mortgages and help make them more affordable for borrowers. For a loan to be compliant, the amount borrowed must be below a certain threshold that changes from year to year.
This year, the limit for compliant loans is $ 548,250 in most of the United States. In high-cost areas of the country, it is $ 822,375. Next year, the limit for compliant loans will drop to $ 647,200 in most countries. This represents an increase of 18%. Meanwhile, in high cost areas, the compliant loan limit will increase to $ 970,800.
Why Are Compliant Loan Limits Increasing?
Increasing compliant loan limits is a good thing for buyers. While it’s possible to get a non-conforming loan if you buy an expensive home for the area you live in, non-conforming loans can result in higher interest rates and fees. This is because the lenders who give them away take more risk. Non-conforming loans can also be more difficult to obtain.
Why are the limits on compliant loans increasing so much? It comes down to soaring house prices.
In the third quarter of 2021, house prices rose 18.5% from the previous year nationally, according to the housing price index of the Federal Housing Finance Agency. That’s a big jump from the third quarter of 2020, and it explains why homebuyers now need more flexibility on how much they can borrow.
Should you take a bigger mortgage in 2022?
Next year, borrowers looking for compliant loans will have more flexibility in how much they can borrow. But that doesn’t mean you have to rush to take out a bigger mortgage than you expected.
The more you take out a mortgage, the more difficult it can be to manage your monthly payments. And it could put you at risk of falling behind on your home loan or accumulating other debt.
As a general rule, your housing costs, including your mortgage payment, property taxes and home insurance, should not exceed 30% of your take home pay. If you exceed this threshold, you may find it difficult to manage your bills. Before signing a mortgage, use a mortgage calculator to calculate a few numbers and see how much loan you can actually afford.
Now you might be thinking, “Won’t my lender know how much I can afford to borrow?” And the answer? Not necessarily.
Your lender will look at your existing debts and use this data to determine the loan amount and the interest rate for which you are eligible. Your lender will also look at your income. But that doesn’t mean that your lender will see your financial situation in full.
You may be spending a lot of money on child care expenses. It is not considered a debt payment. Rather, it is a recurring invoice. And while you may know that child care is costing you $ 1,200 per month, your lender may not. This is why you are really in a much better position than a mortgage lender to determine how much to borrow for a home. And you shouldn’t let the fact that compliant loan limits increase get the better of you.