2006 mortgage conforming limit rises to $417,000
By Holden Lewis • Bankrate.com

Homeowners will be able to get bigger mortgages in 2006 without having to get higher-rate jumbo loans.

The conforming limit will rise to $417,000 in 2006, an increase of almost 16 percent over the 2005 limit of $359,650. That's the limit for single-family homes in the continental United States.

Conforming mortgages are home loans that conform to standards set by Fannie Mae and Freddie Mac, the mortgage giants that keep money flowing by buying home loans from lenders and selling them as investments. The conforming limit marks the maximum loan size that Fannie and Freddie may buy.

Jumbo mortgages, higher rates
A loan for larger than the conforming limit is known as a jumbo mortgage. These loans generally have rates that are one-eighth to one-quarter of a point higher than those for conforming loans. Conforming rates are lower because they have an implicit subsidy: Most people think the government would bail out Fannie or Freddie if they were on the verge of failure.

The new conforming limit applies to loans sold on the secondary market in 2006. Nothing stops lenders from closing loans now and waiting until January to sell them to Fannie or Freddie, so a lot of mortgage bankers already have been quoting conforming rates on loans above the 2005 limit. It was no secret that the limit would rise this year; it was only a matter of how much. Plenty, it turned out. At 15.95 percent, this was the biggest increase in at least 25 years.

New 'conforming' limit
The Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, comes up with the new conforming limit, annually, by calculating the change in average home prices. OFHEO says the average price for a single-family house in October 2005 was $306,759, compared to a $264,450 average price in October 2004. That was the biggest annual increase since at least 1980, when the conforming limit was $93,750.

The limit hasn't always gone up. It fell $150 in 1990 and was unchanged in 1994 and 1995. It went up by double-digit percentages from 1986 to 1989.

Multifamily limits
The new limit of $417,000 applies to single-family homes in the continental United States. Limits for multifamily homes will rise, too:

• $533,850 for two-family homes;
• $645,300 for three-family homes;
• $801,950 for four-family homes.

The limits are 50 percent higher for Alaska, Hawaii, Guam and the Virgin Islands. In those places, for example, the single-family limit will be $625,500.

The limit for second mortgages will rise to $208,500 in the continental United States and 50 percent higher in Alaska, Hawaii, Guam and the Virgin Islands.

The Federal Housing Administration has updated the 2006 limits for FHA-insured mortgages. Those limits vary by county, depending on how expensive the houses are -- from a low of $200,160 in cheap places such as Pierre, S.D., to a high of $362,790 in expensive places such as Los Angeles.