To qualify for a $1 million mortgage, Americans typically have to make a down payment of at least 20% of the home’s price. Starting next year, some buyers could put as little as 3% down.
The cap for home loans backed by
and
rises to $1,089,300 next year in a few expensive markets including Los Angeles and New York, up from $970,800, the Federal Housing Finance Agency, or FHFA, said Tuesday. The higher limit means borrowers can qualify for bigger loans without needing to take out jumbo mortgages, which aren’t federally backed and have more-stringent requirements for income, credit and down payments.
For most parts of the country, federally backed mortgage limits will rise to $726,200 from a 2022 maximum of $647,200, the agency said. The limits are calculated annually using a formula that factors in average housing prices, which have been on the rise. The majority of mortgage loans are federally guaranteed.
In October, 12.5% of for-sale homes were priced at or above $1 million, according to Realtor.com data.
The new caps will give those looking to buy a home more options, said
Daryl Fairweather,
chief economist at real-estate company Redfin Corp. “For buyers, it [the new cap] opens up a whole new set of homes for them to consider that may have previously exceeded their budget for a monthly mortgage payment,” she said.
Having the option to make a smaller down payment for a more expensive home could somewhat offset higher home prices, said
Kate Wood,
a home and mortgage specialist at
In addition to still-high home prices, would-be buyers continue to face headwinds from a lack of housing inventory, inflationary pressures on their overall budgets and anxiety about a possible recession.
“Buyers aren’t by any means getting a bargain, but needing to save $30,000 for a down payment—rather than $200,000—could make a home in the million-dollar range more attainable,” said Ms. Wood.
A key difference between jumbo mortgages and federally backed loans is accessibility.
Generally, lenders for jumbo mortgages want borrowers to have a credit score of 740 or higher and a debt-to-income ratio in the range of 36% to 43%%, said
Jeff Ostrowski,
mortgage analyst at Bankrate. Down-payment requirements can vary by lender.
For many federally backed loans, debt-to-income ratios might go as high as 50% and credit scores are typically at least 620.
Loans with down payments below 20% generally require private mortgage insurance. The average down payment has risen since the pandemic, along with home prices.
The downsides of taking out a big mortgage with a small down payment are higher monthly payments and the need to pay private mortgage insurance. For a borrower with a $1 million mortgage and solid financials who made a 3% down payment, private mortgage insurance would add about $500 to their monthly mortgage payment, said Ms. Wood.
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There might be other benefits to mortgages within the federal limits, said
Danielle Hale,
chief economist at Realtor.com. (News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.) During the pandemic, for example, the Cares Act offered forbearance options to households that have federally backed mortgages because the government can set policy for mortgages backed by Fannie Mae and Freddie Mac, she said.
Some buyers who qualify for traditional jumbo loans might be better off sticking with that option, said Mr. Ostrowski, the mortgage analyst at Bankrate. Historically, jumbos have been more expensive than conforming loans—or those that meet FHFA’s criteria and the guidelines established by Freddie Mac and Fannie Mae—but recently they have kept lower interest rate.
The national average mortgage rate for conventional 30-year loans was 6.81%, while the average jumbo rate was 6.43%, according to Bankrate’s Nov. 22 lender survey.
Andrew Ackerman contributed to this article.
Write to Veronica Dagher at Veronica.Dagher@wsj.com
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