Since the pandemic began, Americans have reevaluated the meaning of the word home. That’s led some renters to realize the many benefits of homeownership, including the feelings of security and stability and the financial benefits that come with rising home equity. At the same time, many current homeowners have decided their house no longer meets their needs, so they moved into homes with more space inside and out, including a home office for remote work.
However, not every purchaser has been able to fulfill their desire for a new home. Here are two obstacles some homebuyers are facing:
- The ability to save for a down payment
- The ability to qualify for a mortgage at the current lending standards
This past week, both of those challenges have been mitigated to some degree for many purchasers. The FHFA (which handles mortgages by Freddie Mac, Fannie Mae, and the Federal Housing Administration) is raising its loan limit for prospective purchasers in 2022. The term used to describe the maximum loan amount they will entertain is the Conforming Loan Limit.
What Is the Difference Between a Conforming Loan and a Non-Conforming Loan?
Investopedia explains the difference in a recent post:
“Conforming loans are the only loans that meet the requirements to be acquired by Fannie Mae and Freddie Mac. Jumbo loans, which exceed the conforming limit, are the most common type of nonconforming loan.”
What Difference Does It Make to Me as a Home Buyer?
A Forbes article earlier this year explains the benefits of a conforming loan and why they exist:
“Since lenders can’t sell non-conforming loans to Fannie Mae or Freddie Mac to free up their cash, they’re a bit riskier for the lender. This is especially true for jumbo loans, which aren’t backed by any government guarantees. If you default on a jumbo loan, it’s a huge blow to the lender.
Thus, lenders generally charge higher interest rates to compensate, and they can have even more requirements. For example, lenders who give out jumbo loans often require that you make a down payment of at least 20% and show that you have at least six months’ worth of cash in reserve, if not more.”
What Happened Last Week?
The FHFA has significantly increased its Conforming Loan Limits for 2022. Sandra L. Thompson, FHFA Acting Director, explains in the press release that:
“Compared to previous years, the 2022 Conforming Loan Limits represent a significant increase due to the historic house price appreciation over the last year. While 95 percent of U.S. counties will be subject to the new baseline limit of $647,200, approximately 100 counties will have conforming loan limits approaching $1 million.”
This means that more homes now qualify for a conforming loan with lower down payment requirements and easier lending standards – the two challenges holding many buyers back over the last year.
The Federal Housing Administration (FHA) also increased its Conforming Loan Limits for 2022. That could also mean an easier path to homeownership for many prospective buyers. As the Forbes article explains:
“FHA loans can be very beneficial if you don’t have as much savings, or if your credit score could use some work.”
Boston Condos and the Bottom Line
Buying your first or your next home may have just gotten much easier (less stringent qualifying standards) and less expensive (possibly lower mortgage rate). Let’s connect to discuss how these changes may impact you.
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One of the biggest misconceptions for first-time Boston condo for sale buyers is how much you’ll need to save for a down payment. Contrary to popular belief, you don’t always have to put 20% down to buy a Boston real estate. Here’s how it breaks down.
A recent survey by Point2Homes mentions that 74% of millennials (ages 25-40) say they’re interested in purchasing a home over the next 12 months. The study notes, “88% say they have significantly fewer savings than the average national down payment amount, which is $62,600.”
Thankfully, $62,600 is not the amount every buyer needs for a down payment in the United States. There are many different options available, especially for first-time homebuyers (millennial or not). That amount can also be significantly less, depending on the purchase price of the house.
According to the National Association of Realtors (NAR), “The median existing-home price for all housing types in August was $310,600.” (These are the latest numbers available). NAR also indicates that:
“In 2019, the median down payment was 12 percent for all buyers, six percent for first-time buyers, and 16 percent for repeat buyers.” (See graph below):
That means if a qualified first-time buyer purchases a home at today’s median price, $310,600, with a 6% down payment, in reality, the down payment only amounts to $18,636. That’s nowhere near $62,600.
Knowing there are also programs like FHA where the down payment can be as low as 3.5% of the purchase price for a first-time buyer, that up-front cost could be significantly less – as little as $10,871 for the same home noted above. There are also other programs like USDA and loans for Veterans that waive down payment requirements.
The Point2Homes study also shares how much millennials have indicated they’ve saved for a down payment. As we can see in the graph below, 39% have already saved enough for a down payment on a median-priced home. Another 47% are close to reaching that goal, depending on the purchase price of the home. Unfortunately, the lack of knowledge about the home buying process is keeping many motivated first-time buyers on the sidelines. That’s why it’s important to contact a local real estate professional to understand the requirements in your local area if you want to buy a home. A trusted agent and your lender can guide you through the process.