High Cost Mortgages & Conforming Loan Limits

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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.

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.

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.

2022’s conforming loan limit is 648,200.

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 $970,800 ($647,200 multiplied by 150%).

2022’s high cost mortgage loan limit is $970,800.

FHFA's method for calculating high cost mortgage areas
FHFA’s method for calculating high cost mortgage areas

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 2022. The interactive map on FHFA’s website is here: FHFA’s interactive map.

Map of High Cost Mortgage Areas for 2022

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.