California conventional loan limits increased for 2021, which is great news for California residents. Higher conventional loan limits mean borrowers don’t need a jumbo loan in many areas of the state. Since jumbo loans are harder to secure and in some cases more expensive, this is great news for the residents of California.
Understanding the California conventional loan limits, how much they increased, and how they work can help you choose the loan that’s right for you. While you have many options for mortgage financing, nothing is more attractive and affordable than conventional financing. Here’s what you must know.
What are Conventional Loan Limits in California?
The ‘average’ conventional loan limit in California is $548,250, just like it is in other areas of the country. This is the standard limit, that if you exceed, you’d need jumbo financing. However, in certain areas of California, there are higher costs and the areas have higher limits as a result.
Some of the high-cost areas of California include:
- Alameda – $822,375
- Contra Costa – $822,375
- El Dorado – $598,000
- Los Angeles – $822,375
- Marin – $822,375
- Monterey – $739,450
- Napa – $816,500
- Orange – $822,375
- Placer – $598,000
- Sacramento – $598,000
- San Benito – $822,375
- San Diego – $753,250
- San Francisco – $822,375
- San Luis Obispo – $701,500
- San Mateo – $822,375
- Santa Barbara – $660,100
- Santa Clara – $822,375
- Santa Cruz – $822,375
- Solano – $550,850
- Sonoma – $707,250
- Ventura – $739,450
- Yolo – $598,000
Unless you buy a home (or live in) a high-cost area, conforming loan limits of $548,250 prevail. If you need to borrow any more than this amount, you’ll need a non-conforming or Jumbo loan that may have higher interest rates and/or tougher qualifying requirements. Fortunately, many counties within California have higher limits because of the high cost of living there.
How Does it Work?
Conventional loan limits pertain to conforming loans, aka Freddie Mac and Fannie Mae loans. All loans that fall within their guidelines ‘conform’ to the Fannie Mae or Freddie Mac rules. These loans have the benefit of backing by Fannie Mae or Freddie Mac which means if a borrower defaults, the lender won’t lose all the money invested in the loan.
Fannie Mae or Freddie Mac loan
You must borrow within the conventional loan limits to qualify for a Fannie Mae or Freddie Mac loan, and meet these guidelines:
- Minimum 3% down payment for first-time homebuyers or 5% for subsequent homebuyers. If you’re refinancing, you’ll need at least 5% equity in the home.
- Borrowers need decent or even good credit scores. The score required varies, but in general, you should have a 660+ credit score to qualify and get the best interest rates.
- Borrowers need a low debt-to-income ratio. This is a comparison of your gross monthly debt (income before taxes) and your current debt obligations (plus the new mortgage). Your DTI shouldn’t exceed 43%, which means your debts with the new mortgage shouldn’t take up more than 43% of your monthly income.
- Proof you can afford not only the monthly payments, but the down payment and closing costs too.
- Any compensating factors that make up for a lower credit score or higher debt ratio are important too. For example, a credit score below 660 doesn’t automatically disqualify you, especially if you have a large number of assets on hand or an exceptionally low debt ratio that helps you qualify.
If you don’t buy a home that falls within the conventional loan limits, you’ll need a non-conforming loan. This isn’t’ a ‘bad thing,’ but it can be more expensive and harder to qualify for which is why it’s good news that California conventional loan limits increased this year.
What Conforming Loan Programs can you Use?
Conforming loans are conventional loans or those backed by Fannie Mae or Freddie Mac. They must meet the above loan limit guidelines and the qualifying guidelines for the loan program.
The basic conforming loan programs include:
- Fixed-rate loans – 10, 25, 20, 25, and 30-year fixed-rate loans
- ARM loans – 5/1, 7/1, or 10/1 ARM loans
Like we said above, you need ‘good’ qualifying factors to qualify for conforming loans. This means you have good credit, money to put down, and a decent debt-to-income ratio. The requirements seem ‘strict’ but they are flexible and great for first-time homebuyers and subsequent homebuyers.
Borrowers can choose which loan term they feel most comfortable with and can afford. Keep in mind, ARM loans are more affordable initially, but then the rate adjusts annually. For example, if you borrow a 5/1 ARM loan you have a fixed rate for 5 years and then it adjusts annually, based on the chosen index and margin.
Why Consider Conventional Loans?
Conventional loans are the most flexible programs because of the government backing. If you need to borrow more than the limits for your county, you’ll need a jumbo loan. If you can’t get a conventional loan because you don’t qualify, it’s worth fixing your qualifying factors so you do qualify.
Here are a few reasons why:
- Lower down payments – While a down payment is an investment in your home, you don’t want to put all your liquid assets into it. The money remains tied until you do a cash-out refinance or sell the home, neither of which you’ll likely want to do anytime soon.
- Easier appraisals – Many Fannie Mae and Freddie Mac loans need limited appraisals or are even eligible for appraisal waivers. They don’t have any strict requirements for the properties and the appraisal doesn’t usually hold up the loan process like it used to.
- Flexible underwriting guidelines – The underwriting guidelines as a whole are flexible with conventional loans. If you can borrow within the conventional loan guidelines, you’ll have simple qualifying requirements that are flexible especially if you have compensating factors.
- Low-interest rates – Conventional loans have some of the lowest interest rates in the industry. With today’s rates and the higher conventional loan limits, you can secure an affordable loan.
- Fast closings – Conventional loans aren’t hard to get from application to the closing table. With an experienced lender, you can get it done in less than 30 days, making you a homeowner fast!
What if you Don’t Fit in the Conventional Loan Limits?
If you don’t meet the conventional loan limits, even in higher-cost areas, you’ll need a non-conforming loan, such as a jumbo loan. Jumbo loans have slightly stricter underwriting guidelines because they offer loan amounts in the $1 million range or higher.
You’ll need good qualifying factors to ensure your ability to qualify including:
- High credit scores
- Down payments of 20% – 30%
- Stable employment and income
- Low debt-to-income ratios
Jumbo loans don’t follow any government guidelines, so lenders can have their specific requirements. They usually have interest rates slightly higher than conventional loans too. When you’re borrowing a large loan amount, even 1/8th of a point difference can make a difference of thousands of dollars in interest.
What if you Don’t Qualify for a Conventional Loan?
If you don’t qualify for a conventional loan, there are other options with more flexible guidelines including the government programs, FHA, VA, and USDA loans. You must meet certain guidelines to be eligible for these programs, but their underwriting requirements are more flexible.
FHA loans are the most flexible loan program available today. You don’t need a specific income or to belong to a certain group to be eligible. Anyone who doesn’t qualify for conventional financing typically turns to the FHA program.
Its guidelines are more flexible including:
- Minimum 580 credit score
- Minimum 3.5% down payment
- Maximum debt-to-income ratio of 43%
- Proof you’ll occupy the home as your primary residence
- Stable income and employment for 2 years
FHA loans have different loan limit guidelines, but like conventional loans, they rarely exceed the $548,250 limit except in certain California counties.
VA loans are another government program, but they are for a limited audience. To be eligible you must have served in the military or be a spouse of a deceased military member who lost his/her life during service.
If you served enough time and have VA home loan benefits, you can use this beneficial loan program which doesn’t require a down payment and has no loan limits. As long as you can prove you can afford the payment and you have full entitlement, you may qualify.
VA loan guidelines are flexible like FHA guidelines including:
- Minimum 620 credit score
- Maximum 43% – 50% debt ratio
- Proof you’ll occupy the property as your primary residence
- Proof you have enough disposable income for your family size and location
- Stable income and employment for 2 years
- Proof of your VA entitlement
One last government-backed loan is the USDA loan. This program is for borrowers with low to moderate-income and who will live in rural parts of California as determined by the USDA guidelines.
USDA loans don’t require a down payment and have flexible underwriting guidelines too including:
- Minimum 640 credit score
- Maximum 41% debt ratio
- Proof you’ll occupy the property as your primary resident
- Proof you don’t qualify for any other loan program
- Stable income and employment for 2 years
How are FHA Loans Different from Conforming Loans?
Many people wonder what’s different about FHA loans and conforming loans. While they have many similarities, there are differences too including:
- Conforming loans require higher credit scores than FHA loans. You can get an FHA loan with a credit score as low as 580, but you’ll need at least a 660 to get a conforming loan.
- You can use conforming loans to buy any type of property including second homes or investment properties. To use FHA financing, you can only buy a primary residence (the home you’ll live in full-time).
- FHA loans charge mortgage insurance for the life of the loan no matter your loan-to-value ratio. Conforming loans only charge mortgage insurance while you owe over 80% of the home’s value. Once you pay the loan balance down, you can request cancellation of the Private Mortgage Insurance.
- FHA loans cater to borrowers with good buying power but whose credit score or credit history makes them an unlikely candidate for a conforming loan.
- FHA loans have different loan limits than conventional loan limits. The FHA loan limit in most California counties is $356,352 and in high-cost counties, it’s $822,375.
Do Conventional Loan Limits Change?
Every year, the Federal Housing Finance Agency looks at conventional loan limits. They determine the conventional loan limit and high-cost limit in certain areas based on the median cost of homes in the nation and specific areas.
The California conventional loan limits change annually – and they typically increase. This makes it easier for borrowers with all qualifications to secure conventional financing.
Jumbo loans can be harder to secure because of the risk they involve. Only borrowers with great credit, low debts, and a lot of assets qualify, which rules out the general population. Fortunately, with higher conventional loan limits, loans are easier to get in California, making homeownership a reality for millions of people.