Think its hard getting buyers now? It may get more difficult 2 months from now. Currently, Conforming loan limits are as high as $729,750 (in certain high-cost areas) thanks to the Economic Stimulus Act of 2008. What this means is that the Government has allowed Fannie Mae and Fredie Mac to purchase loans up to this loan amount resulting in favorable borrowing rates. Technically you can purchase an $810k home for only 10% down and still get a 30-year fixed loan in the 6's with a 700+ FICO (as well as other Underwriting requirements). This is based on today's rates after the closing bell. Not bad at all. Similar rates for a $250k home with only 5% down. See whats going on? $200k loan and $700k loan with very similar rates.
Now lets take a look at Non-Conforming loans. If you are in a high-cost area (Southern California for example) and you love a home that's listed for $1.2m you will need to put down 20% and need a FICO of 720+ (740+ gives you a better rate!) to get a 30 year fixed loan in the upper 7%'s or higher. In this category an ARM looks more attractive in the mid 6%'s. You can always put down $500k to get within conforming if you wish!
Fast-Forward to January 1, 2009 (or December 1, 2008 for Wells Fargo and other lenders). The ESA of 2008 will have expired and Conforming limits will be reduced to $625,500 in high-cost areas or back to the $417k in the rest of the Country. In this case, a loan amount of $625,501 would now be considered Non-Conforming (or Jumbo) and subject to the higher rates and lack of viable loan options as indicated above. If you are thinking of closing on your new $800k-$900k home after the Holidays, be prepared to put down an additional 10% or suffer the rate hikes.
Bottom line: homeowners in high cost areas whose mortgaged amounts exceed $625,500 now have a swiftly approaching deadline. Switch to a cheaper conforming home loan prior to December 31, 2008, or risk paying the "jumbo premium". Got a client sitting on the fence? Give them a push (or pull)!
This doesn't just affect home buyers. This also includes homeowners with:
* Two mortgages -- one for $417,000 and one for "the difference"
* An ARM that was begrudingly accepted because jumbo fixed rates were too high
* An expensive jumbo fixed rate mortgage
In these turbulent times it is more important than ever to keep up with the market changes so you are an informed professional and a resource for your clients, friends and family. I would be more than happy to present this and other topics of interest to your office or clients!
Michael Wolff
All I can say is OUCH!!
Thank you for sharing! I have been paying attention to the market changes and updates but hadn't heard this yet (or maybe just hadn't understood it as you explain it). I'm glad I'm aware so if it comes up I will be able to educate homeowners of this potentially severe adjustment.
Also of note are FHA programs which will also be affected. Example, borrowers are ready to purchase a $700k home. They have great credit, excellent income, but dont have significant savings because they may have help family, or paid for a child's tuition or perhaps medical expenses. They have the 5% down and a little more but havent committed yet. After Jan 1, they will have to wait longer to save up a full 10% to qualify.