Anyone who closely follows real estate news has heard that the 2022 conforming loan limits are up – way up. 2021’s conforming loan limit was $548,250. This year it’s up by almost $100k to $647,200 and close to $1m in more expensive areas.
The TLDR is: Buyers can qualify for higher loan amounts with lesser down payments. The bad news – for buyers – is that this change is likely to push median home prices even higher, as more buyers have access to more financing.
What Makes Conforming Loans Significant?
The conforming loan limit is the most money a homebuyer can borrow from a lender using a conventional loan. Every year, the Federal Housing Finance Authority (FHFA) sets these restrictions to determine how much a buyer can borrow without taking out a Jumbo Loan. These restrictions are in place to prevent overborrowing and foreclosures, and they protect both the borrower and the lender.
When a buyer wants to borrow more than the conforming loan limit, even if it’s just $1 over, then they are in jumbo loan territory, where there are stricter guidelines for approval than conforming loans, in addition to higher downpayment requirements and higher interest rates.
The Greatest Loan Limit Increase in History
Using the Q3 House Price Index, the FHFA sets a new conforming loan limit every year. As we have seen, U.S. property values have skyrocketed in the last two years. In 2020, the median house sale price was $337,500. It’s now $404,000! As a result, the higher loan limitations reflect current housing prices.
However, the $647,200 loan maximum is not applied uniformly across the United States. The new restrictions are much higher in more costly locations, such as California, New York City, Alaska, Hawaii, and Washington, D.C., where they max out at $970,800. This is up from the $822,375 upper-end maximum in 2021.
What this means for Home Buyers
Many prospective house buyers trying to purchase a home with a conventional loan were priced out of the market due to the dramatic spike in home prices over the last two years. Homebuyers had to either put more money down or get a Jumbo loan as home prices rose and loan limitations remained essentially unchanged. Jumbo loans are more complicated, expensive, and difficult to qualify for than regular loans, making homeownership less accessible to many people.
However, with such a significant increase in loan limitations for 2022, conventional loan purchasers will be able to compete once more in the market. More people will be able to buy homes without taking out complicated loans, making higher down payments, or meeting more rigid standards.
What this means for Homeowners and Sellers
With the limited inventory of the current market, homeowners and sellers are the biggest winners from this loan limit increase. Homebuyers were already struggling to compete in this market, offering the most they possibly could afford to win a house when multiple buyers are competing for the contract. That ceiling of how much they can offer has just lifted.
For folks who own a home but do not intend to sell, home equity lines of credit might be particularly tempting. As the value of their homes increase, so does the potential for borrowing against that asset.
What This Means for Renters
The most considerable risk for renters is getting priced out of their homes and neighborhoods. When home values go up, rents go up, though there is a bit of a lag. For example, last year, home prices in the Denver metro area increased 21.3%, and rents rose by 16.5%. At first glance, it may appear that renting is trending cheaper than buying. Landlords saw a 21.3% increase in the value of their properties in addition to that 16.5% increase in rental income.
What to do Now
If you are thinking about buying or selling a home in the Denver metro area, we would love to help. Contact us today to learn more about how a Bluebird Real Estate Group agent can help you in this tricky, cutthroat market!