Seeking 'Jumbo' Financing? Now may be the time

Federal Housing Administration loan limits set to reduce October 1, 2011

With Federal Housing Administration loan limits set to reduce October 1, 2011, homebuyers purchasing costlier homes will have to pay more for the most widely used mortgages available.

In an attempt to scale back the size of jumbo mortgages guaranteed in costly real estate markets, the maximum FHA loan amount that Fannie Mae and Freddie Mac back will decrease from $729,750 to $625,500.  Loan limits vary from county to county, with high-cost regions such as New York and San Francisco offering a maximum of $729,750. When the deadline expires, the maximum loan amounts will be set at 115 percent of the local median price, which would drop the limits to $625,500 or lower for high-cost regions and between $417,000 and $625,500 for many other areas.

These maximums are set under the existing law at 115 percent of the local median price. However, with expanded limits currently in effect for 61 percent of the U.S. population, the maximum loans are set at 125 percent of local median price. In addition, the current limits are based on median prices set during the housing bubble, when home values were greatly inflated.

This is significant for homebuyers seeking to purchase in high-cost areas and plan to obtain a government-backed mortgage. For example, a borrower seeking to buy a $1 million home will require a substantial down payment for a government-backed loan of this size, increasing the required down payment from $270,000 to $370,000.

For the majority of upper-middle class homebuyers in these high-cost regions, $1 million affords a comfortable home, not a mansion. According to Zillow, San Francisco has 2,697 homes for sale with a price tag of $1 million or more. The median size for these homes is 3,180 square feet. In New York, there are 16,680 homes for sale in the same price range, averaging 3,308 square feet. The majority of larger cities across America have a significant supply of homes that qualify for the jumbo loan profile. The upcoming loan limit changes have the potential to greatly affect a large market segment of homebuyers and their wallets.

Luxury homes specialist Sotheby’s International Realty reports sales making double-digit gains for the first quarter of this year over last year. The National Association of Realtors released encouraging news that the sale of homes over $1 million were up 5.1 percent in March over the same month last year.

Another important issue for homebuyers is that retail lenders will no longer be able to resell loans over $625,500 to Fannie Mae and Freddie Mac. They will either have to portfolio these loans in-house or find a private investor to purchase them.  Privately-backed jumbo loans typically require a down payment of about 30 percent of the home’s sale price, instead of the standard 20 percent necessary for smaller loan amounts. While this asks more upfront of the homebuyer, it adds security for the funding investor.

These lower loan limits will leave approximately $10 billion more in loans for private investors to manage and they have already prepared to fill the gap when the government backs down. This is evident with data from the fourth quarter of 2010, which shows that private investors originated more loans in the traditional jumbo market than did government agencies. Investors are ready for this change since jumbo loans tend to be safer and more profitable.

Until 2008, all home loans over $417,000 were considered jumbo loans, but in part of the stimulus package in the wake of the housing collapse, Congress twice raised the limit on government-backed loans in high cost areas, first to $625,500 permanently, and then to $729,750 temporarily.

According to the Federal Housing Finance Agency, nearly 669 of the nation’s 3,334 counties or county equivalents will be affected by the upcoming decline.

While regulations and guidelines continue to change, it is important to also consider a cash transaction, which is generally a wise financial decision.

With the deadline looming, homebuyers may want to act now to purchase that luxury or waterfront property. The wide array of available properties and current favorable interest rates create an attractive opportunity to purchase the home of your dreams. To qualify for the current FHA home loan limits, the mortgage must close prior to October 1. It is best to take advantage of these maximum loan amounts well in advance of that date to ensure your home loan will close before the deadline.

This article was submitted by Cornerstone Mortgage Company, a full-service mortgage banker operating more than 81 offices in Texas, Georgia, Minnesota, Oklahoma, Utah, Arizona, Colorado, California, Mississippi, Nevada, Tennessee and Washington. Corporate Office/Houston, 713.621.4663, 1177 West Loop South, Suite 200, Houston, Texas 77027. NMLS 2258.