Potential homeowners, who intend to purchase a home in the range of $417,000 and $729,750 taking advantage of the FHA insured mortgage program, must act quickly to secure the financing for these “jumbo-conforming loans.” Staring October 1, 2011, the maximum amount, in the regions of the country with higher home prices, will drop to a ceiling of $625,000.
Buyers seeking to purchase a home in the before mentioned price range will have to pay more for mortgages – if they qualify. Others will find it difficult to obtain a mortgage in this price range. This lower ceiling will also affect homeowners who have their property up for sale because the market for “qualified” homebuyers will shrink.
Homebuyers who want jumbo mortgages that exceed the limits established by Freddie Mac and Fannie Mae will face higher down payments and higher interest rates. In addition, buyers must undergo tighter underwriting requirements to secure a loan.
Jumbo loan limits are the key to fueling home buying in regions of the country with higher home values, including New York, Los Angeles, San Francisco, and Washington, D.C. The National Association of Home Builders states, over 200 counties, comprised of an estimated 1.38 million primary residences, would end up above the new jumbo loan ceilings. FHA estimates the lower ceiling affect only two percent of the buyers, based on 2011 numbers.
Before the financial market collapsed in 2008, the Federal Housing Administration (FHA) insured home mortgages up to $362,790 in the traditional high value markets, such as New York or California. When the housing crisis occurred in 2008, FHA raised the loan limits to $729,750 in high price real estate regions.
In areas of the country with lower home prices, such as the loan guarantees had a ceiling of $271,050. The higher limits set by FHA made good sense considering the escalation of home prices before the onslaught of foreclosure began. In this case, the Federal Housing Administration played the role Congress created it to do – support the housing and mortgage industries during difficult financial times, such as what occurred during the financial crisis of 2008 - 2009.
As a result, the increased loan limits that were set at the height of the home market, no longer reflect the market conditions that precipitated the increase in the limit. Furthermore, the higher limits are not reflective of current home prices.
The current real estate environment makes it possible to purchase a home at prices far lower than the prices leading up to the crash, for example a home purchased in Atlanta, Georgia in 2007, cost about 24 percent less. Market insiders believe the higher limits do not stimulate market demand.
As the credit crunch subsides, some housing market analysts believe it’s prudent for FHA to transition back to it traditional role of supporting home ownership for buyers traditional underserved by the convention mortgage loan industry.
According to the authors of a report conducted by George Washington University’s Center for Real Estate and Urban Analysis (CREUA), the current jumbo loan levels are inflated , outdated, and does nothing to serve the historical market of the FHA- minorities, first time home owners, and low-income buyers.
Act Now or Pay More!
Borrowers intending to purchase must close their loans by September 30, 2011 to avoid the lower loan limits. It typically takes about two weeks to close a loan after completing the application and submitting the required documentation. The period varies according to the lender. For borrowers with blemished credit or little home equity, failing to meet the deadline could result in an inability to get a mortgage.
Therefore, instead of qualifying for a FHA insured loan up to $729, 750 and a down payment of 3.5 percent, or refinancing with little equity in their home, these buyers will have to apply for convention non FHA conforming loans- with stringent underwriting requirements.
The requirement for jumbo loan depends on the lender. One lender may require a 20 percent down payment/ equity, and a 740 credit score to approve a mortgage refinance. Some mortgage lenders will accept a 10 percent down payment, but may require a 760 or higher credit score. This is in addition to other requirement, such as level of revolving credit or payment history.
Generally, borrowers will need a debt to income ratio of 36 to 45 percent for jumbo loans. Higher loan amount may require higher down payment and equity. Nonconforming jumbo loan may also have a higher interest rate of a ½ percent or more compared to Fannie and Freddie mortgage interest rates. Some analysts see the mortgage industry providing more product diversity, such as 30-year fixed rate jumbo mortgages and 5/1 adjustable rate mortgages.