Upper Limits for Conforming and FHA Loans to be Cut.
If you’re currently looking to purchase a home in San Carlos, then you’ll probably want to read this. If you’re currently looking to purchase a home and you’re putting down less than 20%, then you’ll definitely want read this. The high-balance conforming loan, that magnificent lending instrument that has fueled the majority of home purchases in San Carlos over the past two years, is about to change — and the change will hit buyers in the pocketbook as early as this summer. And home buyers who plan to put down less than a 20% down-payment will be affected the most. But before we dive into the what’s and why’s, it might be helpful to summarize how we got here in the first place.
A Quick History.
Prior to 2008, if you were getting a loan to purchase a home, that loan would fall into one of two buckets: If the loan amount was $417,000 or less, it was a “conforming” loan. Anything higher than $417,000, and you were looking at a “jumbo” loan. Conforming loans had to adhere to, or “conform” to, the loan standards set forth by Fannie Mae and Freddie Mac — hence the name. Because these loans were less risky and easier to sell on the secondary market, their rates were usually lower than those of jumbo loans. By contrast, the money to fund the jumbo loan pool comes mostly from private investors and firms — many of which are foreign.
Enter the credit crunch of 2008 and the reckoning hour for those millions of sub-prime loans that were sold. The economy takes a face-plant, Fannie Mae and Freddie Mac teeter on the verge of collapse, and funding pool for jumbo loans disappeared virtually overnight as spooked investors pulled their money out. The housing market came to a screeching halt, especially in high-value markets where $417,000 looked more like a down payment than a principal loan.
Through the Housing and Economic Recovery Act of 2008, the government stepped in and injected billions of dollars into Fannie Mae and Freddie Mac to keep them solvent, and authorized them to increase the upper limit of loans they could accept from $417,000 to as high as $729,750 for “higher value” markets — like the Bay Area. The same extension was enacted for FHA loans as well.
That single act did more to rescue the housing market in San Carlos, where the average home sale was still close to $1M, than any other piece of legislation. The high balance conforming loan became THE loan of choice for the majority of home buyers, and it kept the real estate market moving during the recession. The increase of the upper end of the loan limit was a year-to-year decision, and the government chose to continue with the higher loan limits twice, in 2009 and then again in 2010.
Fast forward to 2011 — unemployment is down, interest rates are stable, and the housing market is growing once again. The recession appears to finally be behind us. In light of this, the US Government extracted itself from funding the conforming loan pool, with the intent of pushing Fannie Mae and Freddie Mac to be more self sufficient. And most important, jumbo loans are back in favor with private investors again.
But later this summer, the government must again decide whether to extend the conforming loan limits to $729,750 for another year. And from all indications, it appears that they won’t this time around. While they won’t eliminate the extension entirely, it does mean that changes are on the horizon for some home buyers.
Limits to be Reset.
Although the decision won’t be made until summer, it’s widely anticipated that the upper end of the high-balance conforming and the corresponding FHA loan will be ratcheted down to $625,500 from $729,750 in the designated high-value areas. That means any loan amount higher than $625,500 will now become a jumbo loan. Unlike 2-3 years ago when the difference in rates between conforming and jumbo loans was a whopping 2 points, jumbo loans are enjoying a resurgence in popularity today and their rates are only about 1/4 to 1/2 point higher than conforming loans. Still, this will make home buying more expensive for many prospective home owners that have to now go the jumbo route.
Low Down Payments Hit Hardest.
A big attraction to the conforming and FHA loans is that they allow borrowers to purchase a home if they have less than a 20% down payment. For conforming loans, a borrower could bring in only 10% and still get a loan — for FHA, the required down payment is a little as 3.5%. Of course, in both of these scenarios, the borrower is required to purchase some sort of mortgage insurance, which increases the overall cost of the loan. But you can understand the popularity of these option with that segment of buyers.
If the upper-end of the loan limit is dropped to $625,500, then this segment of buyers will lose over $100,000 of purchasing power. Why? Because as of right now, jumbo loans require a minimum 20% down payment. So for a buyer today who qualifies for the highest conforming loan limit and only has a 10% down payment, they will be able to buy a home around $810,000. After the limit is reduced, that very same buyer’s purchasing power will be cropped to about $700,000. That may be the difference between buying a home and settling for a condo. It’s a big deal…
The lending landscape looks to be changing this summer. If you’re shopping for a home right now and plan to utilize a high-balance conforming loan or an FHA loan, then you must close escrow on your house before September 30th to take get those higher limits. After that, they’re gone. This is clearly one case where waiting will only cost you more in the long run.
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