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What Does the 2011 Conforming Loan Extension Means For You?

Written By:
October 11, 2010 at 1:25 AM

Each year Uncle Sam conduct an assessment of the “maximum acceptable loan size” supported by a survey of the average housing costs from cities across the country. This year, Congress’s decision to extend the current conforming loan limits until September 30, 2011 should alleviate some anxiety in the home mortgage market. Many homebuilders, real estate brokers and mortgage lenders petitioned legislators to maintain the upper limits in expensive real estate markets, especially in light of the weak housing market.

The conforming loan limit determines the maximum loan that the quasi-public enterprises ? Freddie Mae (FNMA) and Freddie Mac (FHLMC) ? can purchase. FNMA and FHLMC buy most of the residential mortgages from banks and other mortgage lenders. Buying these loans frees up capital for lenders to reinvest into making more mortgages. The conforming loan limit also determines the maximum loan the Federal Housing Agency (FHA) can guarantee on home mortgages.

Below are the standard conforming loan limits buyers need to know before searching or refinancing a home:

  • 1-unit properties $417,000
  • 2-unit properties $533,850
  • 3-unit properties $645,300
  • 4-unit properties $801,950

About 200 areas have expensive real estate and receive “loan limit exceptions” The conforming loan limits in these cities range from $417,001 to $729,750.

Jumbo Mortgage: Relief for Some Consumers

The considerable increase in real estate values ? leading up to the housing bubble? pushed home prices appreciably higher in some regions of the country. When home prices exceed conforming loan limits, homebuyers must take out “jumbo loans” to purchase ordinary homes in expensive cities. Jumbo loans refer to home mortgage loans above the conforming loan limits. Usually, consumers pay higher interest rates for jumbo loans compared to conforming mortgages.

Before 2008, jumbo loan interest rates obligated buyers to pay as much as two percentage point more to obtain financing. Mortgage lenders justify charging borrowers higher interest rates based on the higher risk associated with jumbo loans. The rules do not allow FNMA and FHLMC to purchase these instruments because they exceed the limits set by the agencies. Analysts expected up to 60,000 additional buyers to qualify for the lower rate conforming mortgages.

Refinancing jumbo loans tend to cost homeowners more for closing costs. However, some borrowers may desire to refinance their home, but cannot qualify for conforming loans ? even with extension of the limits. One possible solution involves discussing an extension and consolidation agreement with their lender. An extension and consolidation agreement enables homeowners to avoid paying mortgage-recording taxes on the same principal mortgage balance.

Find out if your state laws allow for the waiver of the mortgage recording tax.

Good News for Buyers

Had Congress not approved the mortgage loan limit extension, the conforming loan limit would have capped at $625,500 in the higher-priced markets. The passage of this conforming loan extension makes the maximum mortgage limits as high as $729,750 in areas of high real estate values or 125 percent of the median home value for a metropolitan area, whichever is less. Areas like Boston, New York, Los Angeles and Washington D.C. stand to gain the most benefits from Congress actions.

As home prices continue to decline, many properties fall within the guidelines of the conforming loans limits. Therefore, more borrowers will qualify to receive lower interest rates. In addition, the FHA guarantees more of these loans in high-cost regions. This makes more money available for the residential mortgage market.

Before beginning their home search, buyers should learn what the conforming loan limit is for their market. Next, determine how much mortgage you can comfortably afford. The current buyer’s market gives the average homebuyer the chance to purchase more home for his or her money.





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