New limits on jumbo, FHA mortgages now in effect

Homeowners can now get slightly bigger loans, without paying a premium for "jumbo" mortgages, because home prices keep rising.

Fannie Mae and Freddie Mac have increased their conforming loan limits, effective Jan. 1.

- advertisement -

A home loan for $333,700 or less will be counted as a conforming mortgage throughout 2004.

"Conforming" home loans are those that conform to rules that Fannie and Freddie issue. These agencies then bundle and sell the loans in the secondary market, a process that creates an efficient mortgage market in the United States and holds mortgage rates down on those loans.

A home loan above the conforming amount is a jumbo mortgage. Rates on jumbo mortgages tend to be about one-quarter to one-half a percentage point higher than the rates for conforming loans.

Some jumbos are supersized
The conforming loan limit of $333,700 applies to first mortgages on single-family houses in the continental United States. The limit will be 50 percent higher, or $500,550, in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Conforming-loan limits for multifamily homes have increased, too. In the continental United States, they will be:

• $427,150 for two-family residences;
• $516,300 for three-family residences;
• $641,650 for four-family residences.

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

In 2003, the conforming loan limit for single-family homes in the continental United States was $322,700.

The conforming limits are updated every year by Fannie Mae and Freddie Mac, the two biggest buyers and bundlers of mortgage debt. 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.

The Federal Housing Finance Board says the national average single-family house purchase price was $243,756 in October, up from $235,717 in October 2002. That 3.4 percent increase is matched by the 3.4 percent increase in the conforming loan limit.

Why jumbos are more expensive
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.

FHA mortgage rules change, too
The updated data on home prices affect the limits for Federal Housing Administration-insured mortgages, too. The base FHA loan limit has been increased for 2004 to $160,176 for single-family homes in low-cost areas. The FHA has higher limits in higher-cost areas, and tops out at $290,319 for single-family homes. The FHA limits in most areas fall somewhere between the minimum and maximum. For example, the single-family limit is $160,176 in Orlando, Fla., and $237,500 in Chicago. You can look up the FHA limit for a particular county on this hard-to-find Web page.

Unfortunately for residents of high-cost areas, Fannie and Freddie don't follow the FHA's practice of establishing loan limits by county. Thus, the Fannie and Freddie conforming loan limit is the same in low-cost North Dakota as it is in California, where housing costs are astronomical in much of the state. According to the California Association of Realtors, the median home price in California is $381,200, well above the conforming loan limit for a single-family home.