Conforming, jumbo mortgage loan limits for 2003

The upper loan limit for conforming mortgages in 2003 is $322,700. A home loan for $322,700 or less is a conforming mortgage; a loan for more is a jumbo mortgage.

Jumbo mortgages tend to have higher interest rates than conforming loans -- about one-quarter to one-half a percentage point higher.

The conforming limit of $322,700 applies to first mortgages on single-family homes in the continental United States. The limit will be $484,050 in Alaska, Hawaii and the U.S. Virgin Islands.

Conforming limits for multi-family homes will increase, too. In the continental United States they will be:

• $413,100 for two-family residences;
• $499,300 for three-family residences;
• $620,500 for four-family residences.

The limits are 50 percent higher in Alaska, Hawaii and the U.S. Virgin Islands.

Fannie Mae and Freddie Mac are the two biggest buyers of mortgages. They buy loans and sell them in bundles to investors. Each year, Fannie and Freddie update the limits for conforming loans based upon the change in the average home price as calculated by the Federal Housing Finance Board. The updated limits are announced around Thanksgiving and go into effect Jan. 1.

Jumbo loans carry higher interest rates for several reasons. First, they are riskier to lenders -- not because affluent people are more likely to default, but because affluent people are more likely to pay off their loans early. Lenders don't make as much money when borrowers pay off loans early, so they compensate by charging slightly higher rates for jumbos.

Conforming loans meeting certain credit standards can be bought, packaged and sold by Fannie Mae and Freddie Mac. By standardizing plain-vanilla conforming mortgages, Fannie and Freddie keep the rates down. Presumably, it takes more work to sell jumbo loans to investors, and that is another factor in the slightly higher rates.

The updated limits for conforming loans affect the limits for Federal Housing Administration loans, too. The base FHA loan limit will increase to $154,896 in 2003. The FHA has higher limits in high-cost areas, and will top out at $280,749.