Conforming home loans and jumbo home loans are both considered conventional mortgages. High cost mortgages are home loans that exceed the conforming loan limits but avoid jumbo guidelines.
The conforming loan limits are determined by the national average home price. High cost mortgages are only allowed in areas where property value greatly exceed the standard limits.
Quick Tip: Conforming loans typically have lower down payment requirements and better interest rates than jumbo loans.
What Is a High-Cost Mortgage?
A high-cost mortgage applies to regions where property values significantly exceed the conforming loan limit. The FHFA designates these areas as “high-cost areas,” allowing for higher loan amounts without requiring borrowers to meet jumbo loan criteria.
- Maximum Loan Limit for High-Cost Areas in 2023: $1,089,300 (150% of the baseline conforming limit).
High-Cost Areas include:
- Parts of California (e.g., Los Angeles, San Francisco).
- Areas in Colorado, New York, and Florida.
- Alaska, Hawaii, and certain U.S. territories have unique provisions for even higher limits.
Conforming Loan Limit Overview
It’s important to understand what conforming loan limits are before detailing high cost mortgages. The reason for this is because high cost mortgages are determined by the conforming loan limits.
Conforming loan limits are established by the Federal Housing Finance Agency (FHFA) and represent the maximum loan amount eligible for purchase by Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency (FHFA) is the government agency that sets the mortgage loan limits that apply to conventional mortgages delivered to Fannie Mae and Freddie Mac. Meaning, the FHFA ultimately determines what is considered a “normal” loan and what is considered a jumbo loan.
The Housing and Economic Recovery Act of 2008 (HERA) requires that the baseline conforming loan limit be adjusted each year to reflect the changes in the national average home price. Meaning, the conforming loan limits are adjusted higher as homes get more expensive over time.
2023’s conforming loan limit is $726,200.
Quick note: a conventional mortgage is any mortgage that is a non-government backed home loan. This means most loans that are not FHA, VA, and USDA are considered conventional loans.
Conforming mortgages are home loans where the loan amount does not exceed FHFA’s conforming loan limit. Any home loan that exceeds the conforming limit is then considered a jumbo loan. Jumbo financing require greater down payments and tighter underwriting guidelines.
High Cost Mortgage
The FHFA defines a high-cost area to be: “areas where 115% of the local median home value exceeds the baseline loan limits”. In other words, high-cost areas are where homes get really expensive relative to the rest of the nation.
High-cost areas limit the size of the allowed high cost mortgages. The maximum loan limit for a high cost home loans is 150% of the conforming loan limit set by FHA, or $1,089,300 ($726,200 multiplied by 150%).
Who Sets the Loan Limits in Texas?
The FHFA determines conforming loan limits based on national housing trends. The baseline limit adjusts annually under the Housing and Economic Recovery Act of 2008 (HERA).
2023’s high cost mortgage loan limit is $1,089,300.
What’s interesting is that special statutory provisions set different loan limit calculations for Alaska and Hawaii. Who knew property values were so expensive in Alaska?
High Cost Area Map
The map below highlights counties (non-gray) that are high-cost areas for the year 2023. The interactive map on FHFA’s website is here: FHFA’s interactive map.
Advantages
The advantages of high cost mortgages is that they qualify for conforming financing. Said another way, high cost home loans avoid jumbo financing.
Jumbo financing typically requires higher down payments compared to high cost loans. Likewise, jumbo loans also have more restrictive underwriting guidelines.
These high cost loans ultimately make homebuying more affordable in geographic areas with higher home values.
Disadvantages
The primary disadvantage of high cost mortgages relates to the interest rate. Mortgage lenders may sporadically be less competitive with high cost loans due to their volume mix for the month.
Many lenders target a ratio for the amount of high cost home loans they originate compared to other mortgage types. A lender that originates a large volume of loans in high cost areas may hit their monthly limit and need to reduce their originations. Temporarily raising the interest rates on these high cost loans will reduce their origination volume.
The only way to truly know whether a lender is competitive for these high cost mortgages is to shop lenders. Obviously we don’t love that this is necessary; however, we truly want what’s best of our clients. Here’s how to shop and compare mortgage offers.
How to Qualify for a High-Cost Mortgage
1. Confirm Your Loan Amount and Location
- Check if your loan amount falls between the baseline conforming limit and the high-cost area limit.
- Use the FHFA’s interactive map to verify your location.
2. Prepare Required Documentation
- Proof of income and assets.
- Strong credit score (typically 680 or higher for best rates).
3. Shop for Competitive Rates
- Compare offers from multiple lenders to find the best rate and terms.
Pro Tip: A trusted lender, like the Mortgage Mark Team, will guide you through the high-cost mortgage process and help you secure the best deal.
FAQs About High-Cost Mortgages
What’s the Difference Between High-Cost and Jumbo Loans in Texas?
High-cost loans fall within FHFA’s designated limits for expensive areas, while jumbo loans exceed these limits and have stricter requirements.
Do High-Cost Mortgages in Texas Have Higher Interest Rates?
Rates may be slightly higher than standard conforming loans but are generally lower than jumbo loan rates.
Can I Use a High-Cost Loan for a Second Home?
Yes, as long as the property is in a high-cost area and meets lender requirements.
How Often Do Loan Limits Change?
The FHFA adjusts loan limits annually based on national housing market trends.
Why Choose the Mortgage Mark Team?
Navigating high-cost mortgages requires expertise. With over 20 years of experience, the Mortgage Mark Team ensures you:
- Get clear guidance tailored to your financial goals.
- Receive competitive rates, even in complex high-cost loan scenarios.
- Enjoy a seamless loan process from application to closing.
When you think mortgage, think Mark! Contact us today to start your homebuying journey.
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
972.829.8639
MortgageMark@MortgageMark.com