Big news for FHA loans: the conforming loan limits are going up. This is good for homebuyers since the new limits will better reflect the rising cost of housing across the U.S.
The Biden Administration has opted to increase its mortgage loan limits for single-family homes. This means that in 2022, it will be easier for borrowers to secure higher loan amounts. Homeowners can also refinance their mortgages for larger amounts.
The new baseline limit, which will apply to the majority of single-family homes, is $647,200 - which is up nearly $100,000 from 2021’s limit of $548,250.
FHA loan limits: how it works
The Federal Housing Administration (FHA) generally follows the maximum loan limits that the Federal Housing Finance Agency (FHFA) sets for Fannie Mae and Freddie Mac, which are federally-backed mortgage companies. A “conforming mortgage” is a mortgage that meets both Fannie Mae and Freddie Mac guidelines.
The FHFA sets the conforming limit every November for the following year based on its House Price Index report. This year, their data showed that home prices went up 18.05%. Because of this robust price appreciation, the FHA is raising lending limits so that borrowers can qualify for a wider range of homes.
The FHA calculates loan limits by Metropolitan Statistical Area (MSA) and county - this means that in a relatively high cost-of-living area, like Washington DC, the loan limits will be higher - while in a city like Baltimore, the maximum loan amount will be lower. Because of this, the maximum loan limits will go up in 3,188 counties, but stay the same in the remaining 45 counties for this upcoming year. In high cost of living areas, the new 2022 maximum FHA loan amount is $970,800. In low cost of living areas, the new limit is $420,680.
As of Jan 1, 2022 $647,200 is the average maximum amount a homebuyer can borrow with an FHA loan (for a single-family home). Just because it’s the maximum, though, doesn’t mean you’ll qualify for it - that’s dependent on your credit score, down payment, debt-to-income ratio, location, etc.
“Loan limit increases are tied to national housing prices, similar to conventional loan limits. This past year, national home prices rose 18% overall, so the 2022 limit increase will be 18% of the loan limit for 2021,” explains Arlington-based buyer agent Muoki Musau. “The Fed has a ‘sliding scale’ to account for ‘high-cost markets’ like DC, New York, and San Francisco, where the average home price is at least 115% above the baseline limit. So it’s important to have conversations with local lenders in your market so you know exactly what the limits are in your target buying city.”
Are there new VA loan limits for 2022?
In 2020, VA mortgages were actually amended to have no upper limits. So there will be no new limits for 2022 - since limits no longer apply to this loan type.
Do FHA loan limits increase every year?
The FHA announces an update to loan limits every year; sometimes, if the housing market hasn’t experienced much appreciation, they may announce that there is no change to the limits. If the housing market has been hot all year, though, you can anticipate loan limits rising.
What should homebuyers keep in mind about the 2022 loan limits?
Anyone interested in buying a home in 2022 should start the process by having a discussion with an experienced Realtor along with a mortgage advisor. They will be able to advise you best on what loans fit your unique circumstances - in some cases, you might even be surprised by which mortgage is right for your home.
"Many people are surprised at what actually makes someone qualify for FHA. I’ve worked with many six-figure clients who qualify for FHA bc it’s actually the best solution to purchase the house now," explains Musau. "Have a conversation with your lender about your debt to income ratio. If you’re buying FHA, there might be a chance that your debts are high. Even if you have a sufficient income (even into six figures), if you don’t have enough reserves to offset your debts, FHA might be your best option to start. But you want to have a clear picture so you can begin to budget for your closing expenses."
It's also worth noting that homebuyers who use an FHA loan aren't necessarily stuck with it until they pay off their mortgage.
"Another thing people don't always realize: you don’t have to stay with the FHA loan forever. You can refinance out of it after a certain point and get rid of your PMI," notes Musau. "Some people purchase with FHA because of a variety of financial factors, but after a certain amount of equity and paying down the loan, you can refinance into a conventional loan in the future."
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