What will happen to the $729,000 conforming loan?

Of all of the housing stimulus measures that were introduced in the past two years, none has had a more profound impact on San Carlos real estate than the extension of the conforming loan limit from $417,000 to $729,950.  Certainly the $8,000 Home Buyer’s Credit got more press, but most people looking to buy a home in San Carlos had far too high of an adjusted gross income (AGI) to qualify for this credit.    But if you talk to any loan agent,  they’ll tell you that the majority of loans they processed this year were conforming loans that were close to the new limit of $729K.

Why?  Cheaper, safer money.  Before the conforming loan limit was extended,  you needed to get a jumbo loan if you were to borrow more than $417,000 to buy a home.  Until about a year ago, that wasn’t a problem.  But the money that funds jumbo loans comes from the sale of mortgage-backed securities, and the  buyers of these securities are private investors, often from around the globe.  When the credit market tanked last year, these investors fled for safer ground — thus causing an immediate drought of money to fund these loans.  Consequently, jumbo rates shot up to over 7% virtually overnight, and it had the effect of bringing the housing market here to a screeching halt.

Enter the conforming loan…. it’s a different animal since it’s funded by Fannie Mae and Freddie Mac, so the risk (and consequently the interest rates) are lower, and they’re generally easier to qualify for.   But with a loan limit of $417,000,  it was virtually useless to many home buyers in a market where the average home price was near $1M.  When the government decided to pump a ton of cash into these two institutions and extend the the limit to over $729k though, it opened up all kinds of options for home buyers, and not just first time buyers.

It’s set to expire (again) on 12/31/09.

When the conforming loan limit was first extended in 2008, it was a intended to a be a one-year deal.    But due to the success of the program, the government re-enacted it for 2009, but again only for one year, and it’s set to expire at the end of December.     So if you’re banking on using one of these extended-conforming loans to fund your home purchase, you only have a couple months left to find your home and close escrow….or you’ll need to investigate other funding options.

What are the other options?

If  the loan limit extension does expire as planned, you still have other options available to you.  Let’s look at a few of these…

1. Renew the conforming loan limit. It’s possible that the government will renew the extended loan limit for a third year.  But even if this happens, it will take time for the banks to respond.   In 2009 when the program was renewed, it took until May until loans could be written again.  That’s nearly half the year down the drain.    If they don’t renew the extended limit, it doesn’t necessarily mean the limit drops back down to the old limit of $417,000 — there’s talk that it might only drop to $625,000.  Not bad, but it’s over $100K less than what we have now.
2. Jumbo Loans.  Recently the loan of last resort,  jumbo loans have quietly crept back into favor with buyers.  Rates have plummeted on jumbos recently, and some banks have extensive offerings.  Bank of America is one in particular that will lend 80% up to a purchase price of $2M.
3. FHA Loans.   This is a path that is becoming more popular in recent months.   Loans the meet these requirements are insured by the FHA against default, so they carry lower risk for the lenders.  And with the option to put down as low as a 3.5% down payment, FHA loans make sense for many buyers.

The Bottom Line

The mortgage market will be very dynamic over the next few months with all of these changes.    It’s important that you align yourself with an experienced loan agent who can explain the impact of these changes, and help you decide what option is available to you — especially if you’re right in the middle of house hunting.

Special thanks to Raffi Soghomonian of Bank of America for his contributions to this article.

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