Are you thinking of buying a home? Will you need a loan amount over $417,000? (Chances are VERY good the answer is “yes.”) Then run, do not walk, to your nearest Real Estate agent.
Let me tell you a story.
At the beginning of this year I was working with a client refinancing their home. They had about $650,000 in loans that they wanted to consolidate into one new first mortgage. But the conforming loan limit[i] (the mortgages with the very best pricing) was $417,000, and the high-balance conforming loan limit[ii] (priced higher than conforming loans but better than jumbo[iii] loans) was $625,500. A short while ago the high-balance conforming loan limit was $729,750, so my client asked a reasonable question: What are the odds the high-balance conforming loan limit will go back up to the higher limit?
Because of the current state of politics, I thought the odds were very low – in fact, nil. You see, the higher the loan limit, the more loans would fall under the umbrella of Fannie Mae / Freddie Mac, and the more loans the U.S. Government would be implicitly guaranteeing. Given the political climate in Washington at that time, and the fact that many of our elected leaders wanted to eliminate government involvement in mortgage lending, it seemed unlikely that they would allow an expansion of the program.
In fact, with the current degradation of the political process, the opposite is starting to look likely to occur. It is very likely that instead of increasing the high-balance conforming loan limit to its previous high, it is more likely to be eliminated. High-balance conforming loans are likely to be a victim of the current debt ceiling negotiations, and it is even possible, maybe likely that the conforming loan limit ($417,000 currently) will be reduced.
Why is this? The new conforming loan limits are typically announced during the second half of November. So, it’s a concession that could be made to those who wish to reduce the government without actually saying that they made a concession (until later.) For those advocating for reduced government, they can claim victory – later, down the road, after folks have gotten past the shutdown.
It’s all about saving face.
NAR, the National Association of Realtors, is an extremely powerful lobby and will have to be placated. They want funds available for folks to buy homes. I believe that Congress will leave the loan limit for FHA loans alone. (Currently $729,750 – look familiar?)
This way our political leaders can claim that they’ve reduced government and supported housing at the same time, all while solving the debt-ceiling crisis. Neat, isn’t it?
Let’s get back to you. The median home price in Santa Clara County is currently running over $1 million.
So, when I ask if you will need a mortgage for more than $417,000, it is a relevant question.
If you (or someone you know) is currently in the market for a home, and if you (or someone you know) will need a loan for $417,000 or more, an inexpensive source of mortgage money might – and probably will – disappear very soon. We will be able to find loans for you for non-conforming mortgages; we can now. But they are more expensive, and that is likely to get worse when a huge number of loans suddenly cannot be done as conforming loans, and have to compete for jumbo money.
So, if you (or someone you know) are / is in the market for a home, you might save tens of thousands of dollars over the life of your loan if you purchase before December 31, 2013.
The current and predicted limits are as follows:
|Category||Pricing||Current Loan Limit||Estimated New Limit|
|Conforming||Lowest Price||$417,000||< $400,000|
|High-Balance Conforming||Next Lowest Price||$625,500||Eliminated|
|FHA Loans||Low Price, Mortgage Insurance Required||$729,750||$729,750|
|Non-Conforming (“Jumbo”)||Highest Price||No Limit||No Limit|
So, if you are in the market and you’ll need a loan of more than $400,000, closing your escrow before December 31, 2013 is likely to be much better than closing after.
Citations below from Wikipedia. (I know, but the information is accurate and concise.)
My name is Casey Fleming, and I help families understand and choose their best option for mortgage financing whatever their needs. I originate mortgage loans throughout California, and my mortgage practice is based in Silicon Valley.
NMLS 344375 / BRE 00889527
[i] In the United States, a conforming loan is a mortgage loan that conforms to GSE (Fannie Mae and Freddie Mac) guidelines. The most well-known guidelines is the size of the loan, which as of 2013 was limited to $417,000 for single family homes in the continental US. Other guidelines include borrower’s loan-to-value ratio (i.e. the size of down payment), debt-to-income ratio, credit score and history, documentation requirements, etc.
In general, any loan which does not meet guidelines is a non-conforming loan. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a jumbo loan.
[ii] On February 13, 2008 President George W. Bush signed the Housing and Economic Recovery Act of 2008 which temporarily increased the jumbo conforming limit in the United States. The limit was raised to $729,750 or 125% of the median home value within the metropolitan statistical area, whichever is the lesser. Initially due to expire in December 2008, the new limits were extended through 2010. Mortgage lenders did not freely adopt these new limits, making them essentially “theoretical,” as mortgages above the old conforming limit of $417,000 still attracted higher interest rates.
As of 2010[update], the limit on a conforming loan in “general” areas was $417,000 for most of the US, apart from Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the limit was $625,500. The limit in “high cost” areas was $729,750 and $938,250, respectively.
On October 1, 2011 the jumbo conforming limit of $729,750 in “high cost” areas was reduced to $625,500.
[iii] In the United States, a jumbo mortgage is a mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a “jumbo mortgage”. The average interest rates on jumbo mortgages are typically higher than for conforming mortgages, although not based primarily on credit risk.