Every year, the Federal Housing Finance Agency (FHFA) sets a dollar cap on conventional mortgages that Freddie Mac or Fannie Mae are allowed to back, commonly referred to as a conforming loan limit. In 2020, the conforming loan limit for a single-family home was $510,400. This year, the conforming loan limit for a single-family home increased to $548,250, nearly 7.6% higher!
Blog Category: Loan Types
2023 conforming loan limits have been announced! The Federal Housing Finance Agency (FHFA) sets the loan size limits each year on conventional mortgages that Freddie Mac or Fannie Mae will buy from mortgage lenders. In 2022 the conforming loan limit for a single-family home was $647,800. This year, the conforming loan limit for a single-family home has increased to $726,200. A little over a 12% increase!
2024 conforming loan limits have been announced! New loan size limits are set each year on conventional mortgages that Freddie Mac or Fannie Mae will buy from mortgage lenders. You can see the 2023 loan limits in the chart below. For 2024, the conforming loan limit for a single-family home has increased from $726,200 to $766,550. That is about a 5.5% increase! Loan limits go even higher for 2-4 unit homes.
Is choosing a mortgage lender important? People spend a lot of time looking for the perfect home. There are the countless hours spent poring over real estate listings, the weekend trips to open houses, and the days of driving with your realtor from showing to showing. However, choosing a mortgage lender or broker is often treated as an afterthought. Many buyers simply go with their own bank or a broker/lender recommended by their realtor. They do so without researching competitive rates and looking for lenders who will also educate them.
FHA Loans vs Conventional loans is an important discussion. Since you can no longer drop the MIP on an FHA loan, I wanted to show a comparison between a 3.5% down payment FHA loan and a 5% down payment Conventional loan. I think it may encourage some buyers to save up a bit more to get 5% down for a Conventional loan.
Cash Reserves Requirements for Jumbo loans can be complicated. Jumbo loans, also called Non-Conforming loans, are loans that do not conform to the Conforming loan limits. Conforming loan limits can be found by clicking here. If you have a loan amount that is higher than the Conforming loan limits, then you have a Jumbo loan. Jumbo loans require that a mortgage borrower has cash reserves. The Jumbo loan cash reserves requirement is different from Conforming loans, in that Conforming loans many times do not require cash reserves at all.
What is cash reserves?
Cash reserves is a certain amount that a lender may require that the borrower has left over after they pay their down payment and closing costs at closing, in reserve.
Different lenders have different requirements for cash reserves for their Jumbo loans. There are requirements for the amount of cash reserves, and there are requirements for the types of cash reserves.
Amount of cash reserves (the below is illustrative as it may vary from lender to lender):
6 months of the PITI (principal, interest, taxes, and insurance) are required in general.
Need 4 months PITI if you are retaining your current primary residence
4 months PITI for each rental property you own
And 4 months PITI for a second home/vacation home that you own
Cash reserves are based on all recurring housing expenses for the subject property and in some cases for other property owned by the borrower. Cash reserves are also cumulative, so if you are buying a new home and have a rental property, per the above, you may need 10 months of cash reserves. Housing expenses, also known as principal, interest, taxes, insurance, and assessments (PITIA), include but are not limited to:
- Principal and Interest (as used in the qualifying payment amount)
- Insurances (hazard, flood, and/or mortgage)
- Real Estate Taxes
- Ground rent/leasehold
- Special Assessments
- Homeowners’ association fees
- Monthly co-op fees
- Any home equity loan or HELOC payment, if applicable
Types of cash reserves:
- Cash accounts (checking account, savings account, money market accounts, CD’s)
- Mutual Funds
- Gift money is usually not allowed to count towards cash reserves
- Retirement accounts may or may not be allowed to count towards cash reserves
Retirement accounts as cash reserves
I have seen lenders go back and forth over the years on allowing retirement accounts, such as 401(k), 403(b), IRA, and TSP; to be used as cash reserves.
When a mortgage lender is considering retirement accounts as cash reserves, they are not suggesting that you must liquidate or borrow against the retirement account to generate cash. Lenders are only considering the balance of the retirement account without having to liquidate any of it or borrow against any of it.
Retirement accounts are not very liquid, and hence they shouldn’t be considered cash, which is why at some points in time I’ve seen lenders not allow retirement accounts to count towards cash reserves requirements.
But currently, as of the date of this blog, we have many lenders we work with that allow retirement accounts to be used as cash reserves. This is an important development because it now allows borrowers to only need to have their down payment and closing costs liquid, but not the cash reserves.
Each mortgage lender has dozens of loan programs. And there must be hundreds of lenders. We work with 50 lenders or so. And each lender may have a different interpretation or guideline for each category of the loan. These categories would be related to credit, income, appraisal, assets and debt ratios.
Some things are permanent and some are temporary. The sand drawing in this picture is temporary, very temporary. The recent FHA loan limit increase that the National Association of Realtors (NAR) lobbied for, seems to be temporary. So what is all of the fuss over. For now, we have one extra month of getting loans done at the higher loan limit. That is a big deal? The NAR, however, said the loan limit increase is good for two years. Here is their announcement:
In 2008 Congress decided the mortgage world and the economy in general were imploding. And one of the hundreds of ways they decided that they knew better than anyone else and that they would help (i.e. interfere), was to raise the maximum conforming loan limit that Fannie Mae and Freddie Mac offered for loans.
Fannie Mae, Freddie Mac, FHA, and VA all qualify mortgage borrowers by using their gross income. When getting a mortgage your mortgage lender can gross up nontaxable income to a higher figure to help in qualifying you.
You would think they would use net income, which is after tax income. Especially since a mortgage payment is paid out of after tax income. But they do use gross income. I am sure if they suddenly shifted the guidelines to solely using net income to qualify mortgage borrowers, the allowable debt ratios would go up to compensate for using the lower after tax income.
Getting a 2nd trust mortgage when you bought a home was something I had never heard about when I got in the mortgage business in 1986. This is called a “Purchase Money 2nd trust.” I’d always thought a 2nd trust was something you got when you lived in a property for a long time and had built up a lot of equity (i.e. an equity line). For example when you wanted to tap the equity for home renovations or debt consolidation. However, 2nd trusts to help purchase a new home became common in the real estate boom
A VA loan is a mortgage loan guaranteed by the Veterans Administration. There are numerous mortgage guidelines for a VA mortgage. I wanted to list some of the more important ones below, but you always need to speak to an experienced mortgage loan officer and have them discuss your specific circumstances as there are many other things to consider in addition to the below.
Anyone that reads my blog knows that in general I am not a fan of Interest Only (IO) loans. I have said before that an IO loan is like putting your mortgage on a credit card. But on a refinance it may make sense for a few reasons. If you have already built a lot of equity it may make sense. And if you are more interested in savings than equity building. And if you know you are not going to live in the property forever so have no interest in getting the mortgage paid off.
Do you remember when Interest Only loans were all the rage? And now I never get a phone call about them, and the only loan that anyone wants is a 30 year fixed-rate (and the occasional 5 Year ARM-fully amortizing by the way). How is it that we can dupe ourselves so easily in the middle of an investment bubble and lead ourselves to believe just about anything? Below is an old e-mail that I dug up that I wrote someone when they inquired about an Interest Only loan. I thought it was interesting.
There was an article recently on TechCrunch.com that was titled “This Could Be The Mortgage Industry’s iPhone Moment”. It proclaimed “Quicken Loans sees Rocket Mortgage as the turning point in home financing”. And, “It’s home financing’s iPhone” and “The process takes less than 10 minutes.” Hmmm, we’ll see about that.
The 10 Year Treasury Bond was around 1.8% as of October 28th 2019.
The 10 Year Treasury Bond is not a direct correlation to mortgage rates. It is simply good to know historical information on treasury bond rates.
On August 2nd 2019 the 10 Year Treasury Bond was 1.846%.
On September 3rd 2019 the 10 Year Treasury Bond was 1.461%.
Below are some interesting historical numbers:
In 2018 the average yield of the 10 Year Treasury Bond was 2.91%.
In 2017 the average yield of the 10 Year Treasury Bond was 2.33%.
In 2007 the average yield of the 10 Year Treasury Bond was 4.63%.
In 1997 the average yield of the 10 Year Treasury Bond was 6.35%.
In 1987 the average yield of the 10 Year Treasury Bond was 7.18%.
In 1977 the average yield of the 10 Year Treasury Bond was 7.42%.
Where is the 10 Year Treasury Bond headed next? Stay tuned!
*The source for these numbers comes from:
Many ARM loans are based on the LIBOR index (London Interbank Offered Rate), which currently stands at 0.58%. If you Google “LIBOR interest rate adjustment chart” you can find your own results to see how LIBOR has adjusted over time. Or go to a chart of historical LIBOR rates by clicking here.
There are rules related to the maximum number of financed properties you can have. These are for investment property buyers. There are some mortgage agencies, like Fannie Mae, that will not do a loan for an investment property buyer that already has what they consider to be excessive financed properties.
What if you are buying a new primary residence? Then there is no limit to the number of financed properties that you already have.
Multifamily mortgage financing just got cheaper.
What Is A Multifamily Home?
Multifamily residential homes are two, three, and four unit homes. These are also called duplex, triplex, and four-plex homes. I have also heard them called two-family, three-family, and four-family homes.
Fannie Mae defines multifamily property as, “A property that consists of a structure that provides living space (dwelling units) for two to four families. Although ownership of the structure is evidenced by a single deed.”
Any home with more than 4 units is considered a commercial property. These don’t qualify for a residential loan. I don’t do commercial loans. I do have some knowledge of commercial loans. They typically require large down payments, like 25% down or more. I doubt that will ever change.
Multifamily residential property has historically also required significant down payments. These down payments ranged from a minimum of 15% down to as much as 25% down.
How Did Things Get Cheaper?
New Loan Limits For 2017! The mortgage loan limits have been changed for 2017. For Conventional loans the new limits are:
Conforming loans are:
For Conforming “High Balance” loans in designated high cost areas the new limits are:
Find more details on Conventional loan amounts click here.
Any Conventional loan amount which is higher than the above limits is considered a Jumbo loan (aka non-conforming) and is subject to different underwriting guidelines.
To look up FHA loan limits for your area click here.
To look up VA loan limits for your area click here.
I frequently have people ask me for “one of those no-cost refi’s”. Some people think that mortgage lenders are so hard up for business that they are willing to lose money and simply pay the closing costs for the mortgage borrower. I don’t know of any businesses where losing money is part of the process of making money. A no-cost refi actually comes with a cost…a higher interest rate.
The reality is that a no-cost refi is one where the closing costs are built into a higher interest rate.
Everyone likes to think PMI (Private Mortgage Insurance) is evil. People like to think they should not have to pay it, and want to find a way around paying it. There are ways to work around PMI. But like all things in life, there are trade-offs. A person really needs to look at all the options and trades-offs, and consider how long they think they are likely to spend in their new home. Then everyone needs to consider paying PMI! What do I mean?
READ THE FINE PRINT! READ THE FINE PRINT! Got it? Good.
I have a client who wants my help after having received a mortgage through another bank one year ago. He has been thinking he had a 3/1 ARM on his 2nd trust. A 3/1 ARM is when you have a fixed rate for the first 3 years of the mortgage, and then it adjusts annually thereafter. But, what he really has is a 1 Year Balloon!
I have heard more and more clients tell me that some nameless, faceless mortgage people or “friends” have told them they should refinance from a Conventional loan to an FHA loan. Huh? Usually the smart advice giver is giving the advice because they know the client has had a hard time getting a sufficient appraisal to refinance as a Conventional loan, and that FHA requires much less equity.
A Reverse Mortgage is when your house pays you back, or that is how the commercial goes. But at what cost? And is it worth it?
I get a lot of clients asking me if they would save a lot of money by setting up a bi-weekly mortgage payment plan. A bi-weekly mortgage is one where you make a partial mortgage payment that gets deducted out of every paycheck, which for most people is every 2 weeks. With 52 weeks in a year, and 26 pay periods if you get paid twice a week this is a convenient way to make 13 payments a year instead of 12. I hear people say it is a scam, and not to do it. And then I hear people say that you can cut 13 years off of a 30 year loan, and that it is amazing. It is neither.
The maximum loan size on mortgages varies from area to area. Most people are aware that the Conforming loan limit can be extended in high cost areas. These high cost areas are typically the more urban, high cost markets. But many people are not aware that the Conforming loan amounts as well as the Conforming High Balance loan limits vary from area to area. They are based on a formula using median sales price information for the area.
Actually, the refinance boom is indeed over. However, there are a fair amount of people that still need to refinance. For example, I know of many people who have excellent interest rates on a 15-Year fixed rate mortgage. They thought they would be in their home forever and wanted to get the mortgage paid off over a shorter term. But now have suffered a job setback or some other sort of financial blow, and need to revert to a 30-Year mortgage to reduce the monthly payment.
Let me give you an example.
Let’s assume the following:
• A homeowner owns a home with a $300,000 loan that was refinanced at the bottom of the market in late 2012 or early 2013. And it has a 3.00% 15-Year fixed rate.
• He currently owes $284,000.
• This principal and interest payment is $2,071 not including taxes and insurance.
What is the outcome?
If this homeowner refinanced the current principal to a 30-Year fixed rate today at 4.625%, the principal and interest payment would be $1,460. This would save over $600 a month! I’d hate to see someone lose a 15-Year mortgage, which enabled them to get their mortgage paid off quickly. However, if economic problems have struck someone and they need monetary relief, refinancing to a 30-Year fixed rate mortgage might be the answer.
Actually, the refinance boom is over. However, there are a fair amount of people that still need to refinance. The problem is that the people that have not refinanced when rates were low simply don’t realize that they should still refinance. The people that obviously needed to refinance have already refinanced, in some cases multiple times. There are many people left that can refinance.
Actually, the refinance boom is indeed over. However, there are a fair amount of people that still need to refinance. There are a stunning amount of home equity lines (HELOCs) outstanding and most people will need to refinance those. Most HELOCs were set up so that the first ten years of the loan only require interest only payments and no principal is due. Then, in year 11, the principal would start to amortize. And it amortizes over 20 years, not 30. This is a problem because
The Home Affordable Refinance Program (HARP) is a mortgage assistance program, set up by the Federal Housing Finance Agency in March 2009 to help underwater and near-underwater homeowners refinance their mortgages.
After the housing market crash in 2009 many homeowners were faced with a situation where their house was considered “underwater”. In this scenario, the house value was less than the mortgage loan cost, in other words, having a negative equity value in the home. Refinancing was not an option, nor was selling the home unless they paid the lender for the difference. Unfortunately, this lead many homeowners into foreclosure.
Prior to 2020, veterans could borrow more than the Veteran’s Administration (VA) Loan Limits capped amount, but had to have a down payment of 25% of the difference between the maximum loan limit and the sales price. As of January 1, 2020, the VA has started to allow $0 down loans that exceed the county loan limits.
So now, if a veteran wants to buy a home for $1,000,000 with no money down, they can. $2,000,000? Sure thing. $3,000,000? No problem! However, there are rules and guidelines that come with this new change.
The United States Department of Veterans Affairs requires that the closing costs on a VA refinance be recouped in 36 months or less. If the recoupment period is over 36 months the loan will be rejected.
In other words, the refinance closing costs divided by the monthly savings has to be 36 or less.
For example, if the closing costs on a VA refinance are $3,000. And the monthly savings on the refinance are $400 a month. The recoupment period is 7.5 months because $3,000 divided by $400 a month in savings = 7.5. This is well within 36 months.
Watch out for the asterisk in a sales contract! If you are negotiating with a builder to buy a new construction home and are being offered an incentive to use the builder’s preferred lender or title company, watch out for the asterisk! Or sometimes if you are being asked to consider using an “affiliated service provider” by a Realtor, remember you can always say “no thank you.”
Getting a mortgage when self employed can be tricky. If you own a business and have a loan for it, and you are planning on buying a home, you might be wondering if the business loan will affect getting a mortgage. A business loan can impact your credit score. And if you are the sole proprietor of the business and take out the business loan in your name instead of the business’ name, that may cause issues.