In the ongoing effort to make home ownership affordable, the FHFA released 2023 loan limit increases early raising the maximum conforming loan amount to $726,200 from $647,200 on single family homes.
Affordability Forecast
With low down payment and credit friendly terms, these expanded conforming limits narrow the gap between higher prices and affordability. Home prices nationwide still reflect rapid market appreciation at 15.8% year over year through July. However, home prices at last appear to be stabilizing with a more modest month-over-month increase from July to August coming in at 0.3%. As for futures, year-over-year projections for July 2022 to July 2023 are calming to 3.8% according to CoreLogic’s HPI.
Stronger markets will exceed the average, while markets where home prices spiked are now seeing price corrections. The corrections should be welcomed as they signal markets realigning to a more sustainable growth level and hopefully a dampening of inflation.
Interest Rates
The anticipated Fed rate hike of 75 basis points at the end of this month is appearing in current rates as we’ve seen slight hikes for two consecutive weeks moving through September. Rates are hovering between 5% and 6%. Keeping in mind a healthy market is one with mortgage rates above the 5% level, our year’s steady rate climb is a positive for overall economic health. Below that 5% level requires stimulus from the federal government and signals corrective action is underway to combat a recession or in the recent scenario, a pandemic.
New Limit Translated to Buying Power
Historically purchases prices in the $700K plus range were jumbo loan territory driving a minimum down of 10% and more stringent underwriting guidelines. Welcome 2023 just a little bit early!
With a 3% down of $22,460, you could buy a $748,660 home. (first-time buyers only)
With a 5% down of $38,221, you could buy a $764,421 home.
With a 10% down of $80,689 you could buy a $806,889 home.
With a 20% down of $181,550. you could buy a $907,750 home.
Note: above numbers are rounded to the nearest $1.00. Also, some states such as Alaska & Hawaii have high cost areas with limits up to $1,089,300.
Should you Conform or Jumbo?
Clearly the first answer is, that depends. Historically the answer would have been Conform. Less documentation, more flexible qualifying criteria and low down payment options. The Jumbo product set has become much more user friendly in the last 18 months and we continue to see enhancements to everything from streamlined underwriting (some even offer automated underwriting) to lower down payment options. Below is a quick reference chart with supporting detail immediately following.
Conforming Highlights
- Credit Score – Requirements start as low as 640
- Down Payment – First-time home buyers have access to 3% down payment programs. All other borrowers must bring a minimum of 5% down to qualify.
- Cash Reserves – Limited or no cash reserves required
- Conforming Rates – Often some of the lowest rates available. Rates vary based on an individual’s qualifications and are determined during a fully underwritten pre-approval. Items such as payment history, credit card balances, employment history and savings all factor into the risk based price adjustments determining the final rate and fees. No rate quote is valid until these risk factors have been applied.
- Fees – Conforming offerings are referred to as Agency programs as the funds are sourced through Fannie Mae or Freddie Mac and are government sponsored. Loan level price adjustments stem from the risk factors mentioned above as well as the type of property being purchased. (i.e., Condos, second homes)
- Mortgage Insurance – Mortgage insurance is required on all loan with less than a 20% down payment. The premium can typically be removed by petition once the borrower has made 2 years’ worth of payment and achieved a 22% equity position in the home.
- Underwriting – Automated underwriting minimizes the documentation and offer flexibility in qualifying criteria in most cases.
Jumbo Highlights
- Credit Scores – Most jumbo products require scores of 700 or higher.
- Down Payment – A minimum 10% down payment is standard. Rather than mortgage insurance Jumbo’s have premiums built into the rate for loans with less than 20% down.
- Cash Reserves – A 20% down jumbo typically requires 6 months mortgage payments in cash reserves after closing. In most cases this can be covered by 60% of a 401K account if liquid funds are not available. With less than 20% down reserve requirements can be 12-18 months.
- Jumbo Rates – While historically .375%-.500% higher than Fannie/Freddie conforming loans, currently jumbo rates can be the same or lower than Fannie/Freddie rates. This has largely resulted from increases in Fannie/Freddie Loan Level Price adjustments (premiums added for various elements of risk in each loan). Interestingly 2nd home and investment property rates can also be lower for jumbo loan amounts.
- Underwriting – Unlike Fannie/Freddie loans where much of that process is automated, most jumbo loans are manually underwritten and can require a bit extra documentation. Good news….2021 brought the first few jumbo lenders who now accept approvals using Fannie Mae Automated Underwriting findings. Hopefully more products will follow making Jumbo mortgage pre-approvals easier!
The right path is the one that leads you to your new front door. We’re here to help get you there.
by Sheila Landis for The Landis Group
