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Many real estate investors don't have the capital on hand to buy income properties outright. Rather, they need to apply for a mortgage just like the buyers who seek to purchase properties to live in themselves.
Each year, the Federal Housing Finance Agency (FHFA) sets a limit on conforming mortgage loans to be acquired by Fannie Mae and Freddie Mac, the government-sponsored entities that buy these loans. And given the way home prices have increased in 2020, it's not surprising that conforming loan limits will be rising in 2021.
New conforming loan limits
For the bulk of the country, the conforming loan limit for one-unit properties will be $548,250 in 2021. That's a substantial increase from $510,400 in 2020.
Why the jump? Conforming loan limits are adjusted each year to reflect changes in home prices. According to the most recent FHFA House Price Index, home values increased 7.42%, on average, between the third quarter of 2019 and the third quarter of 2020. As such, conforming loan limits are increasing proportionally.
Meanwhile, in some parts of the country, conforming loan limits will be higher -- namely, in areas with higher median home values. For Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the conforming loan limit will be $822,375 for one-unit properties in 2021.
Sticking to the limits
Exceeding the aforementioned loan limits will push you into jumbo mortgage territory, and that's not necessarily a place you want to be. Jumbo loans are more difficult to qualify for than conforming loans, and interest rates can be less competitive. Investors who stick with conforming loans may have an easier time getting the financing they need to build their portfolios.
What about mortgage rates?
To be clear, conforming loan limits have nothing to do with mortgage rates. The former is a measure of home values and the latter is more reflective of general economic conditions. But real estate investors today are likely concerned with the rate they'll get on a mortgage next year more so than the amount they can borrow to stay within conforming loan limits.
Of course, in the absence of a crystal ball, it's impossible to predict exactly where mortgage rates will go. But most major players in the housing industry agree that they'll stay competitive throughout 2021. Specifically, Fannie Mae expects the 30-year mortgage to stay at under 3% all year. The Mortgage Bankers Association, meanwhile, forecasts that rates will rise to 3.3% by 2021's fourth quarter. But to be clear, even that increase would be far from traumatic, and so investors shouldn't rush to buy income properties early on in the year for fear of losing out on great rates.
Right now housing inventory is extremely tight, but as the year progresses, more homes could come onto the market, giving investors better options to choose from and added opportunities to snag deals. Home prices may also slowly but surely start to decrease as boosted inventory takes the pressure off buyer demand.
Either way, investors will get more leeway when it comes to taking out conforming loans in 2021, and it'll be interesting to see how home prices and mortgage rates trend along the way.
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