Upcoming Loan Limit Changes to Result in Higher Finance Costs for Many Mortgage Borrowers

Homeowners in high cost areas with large mortgages have enjoyed access to some great mortgage financing over the past few years, but unfortunately, that’s going to change later this year. The conforming loan limits, which were raised after the onset of the subprime bust, are about to be reduced – which means significantly higher rates for many mortgage borrowers with large loan balances. 

When the financial crisis hit in 2008, mortgage capital dried up and it became all but impossible for homeowners with loans larger than $417,000 to get mortgage financing. In response, Congress authorized Fannie Mae to begin purchasing loans in designated high cost areas up to $729,750.  Before the change, mortgage financing generally fell into the following two categories:

• Conforming – up to $417,000
• Jumbo – $417,001 and above 

Because jumbo – or “nonconforming” – financing is not backed by the virtually limitless capital of Fannie Mae, it is tougher to qualify for and typically has significantly higher interest rates than conforming loans.  Once Congress authorized Fannie to start purchasing larger loans, it effectively created a new pricing category: 

• Conforming (up to $417,000)
• Super Conforming ($417,001 to $729,750)
• Jumbo (more than $729,750) 

I’ve found that super conforming rates typically are only .125% to .375% higher than a similar conforming loan. Considering jumbo rates are typically .875% to 1.5% higher than conforming rates, depending on the loan product, the creation of the super conforming category has been a godsend for many mortgage borrowers who previously would have fallen into the jumbo category. 

Well, it was good while it lasted, but what the government giveth, it also taketh away. Starting October 1, 2011, the new limits are as follows for one unit residential properties: 

• Conforming (up to $417,000)
• Super Conforming ($417,001 to $625,500)
• Jumbo (more than $625,500) 

If you’re looking to secure mortgage financing for your home in the $625K to $730K range, I highly recommend you get it done this summer. 

Though I’ve only addressed the changes for owner-occupied properties here, investment property loan limits are to be changed as well. If you’re planning to purchase or refinance residential (1 to 4 units) investment property in expensive areas, it’s definitely worth noting how the loan limit changes might impact your cash flow and ROI.

For more information about the current and new loan limits, check out the links below. 

• Conforming Loans Limits by County Prior to October 1, 2011 
• Conforming Loan Limits by County After September 30, 2011

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Mark Fitzpatrick

Mark Fitzpatrick is a real estate investor and veteran mortgage consultant with Lenox Financial Mortgage Corporation dba Weslend Financial based in Irvine, California. His unique combination of real estate investing and mortgage financing experience enables him to offer exceptional knowledge and service to his mortgage clients.

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