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Borrowers can get larger loans in 2005 without having to
pay higher rates for jumbo mortgages.
Mortgage funding titans Fannie Mae and Freddie Mac have raised
their 2005 conforming limit to $359,650, up from the 2004
limit of $333,700. It represents a 7.7 percent increase.
Conforming loans are mortgages that conform to rules set
by Fannie Mae and Freddie Mac, which keep mortgage money flowing
to consumers by buying mortgages from lenders, bundling them
and selling the resulting securities to investors.
The conforming limit is the rule that specifies the maximum
loan amount for a loan that can be bought by Fannie Mae or
Freddie Mac. A mortgage for greater than the conforming limit
is a jumbo loan, and generally carries a rate that's a quarter-
to a half-point higher.
The new conforming limit applies to loans sold on the secondary
market in 2005, and doesn't necessarily apply to loans that
are closed this year. Some lenders will adopt the new conforming
limits immediately, and simply wait until January before selling
them on the secondary market. This is an important point for
people who want to get purchase or refinance mortgages between
the old limit and the new limit this month.
The new conforming limit of $359,650 applies
to single-family homes in the contintental United States.
Limits for multifamily homes will rise, too:
- $460,400 for two-family homes;
- $556,500 for three-family homes;
- $691,600 for four-family homes.
Limits are about 50 percent higher in Alaska, Hawaii, Guam
and the U.S. Virgin Islands. In those places, the single-family
limit will be $539,475.
The loan limit for second
mortgages will be $179,825.
Fannie Mae says most loans are well under the conforming
limit this year, with an average loan size of $160,000 for
single-family homes.
Each year, Fannie and Freddie update the limits for conforming
loans based on the change in the average home price from October
to October, as calculated by the Federal Housing Finance Board.
The board says the national average single-family house purchase
price was $264,540 this October, up from $243,756 in October
2003.
According to the Federal Housing Finance Board,
prices rose 8.5 percent from October to October. Fannie and
Freddie raised the conforming limits by a lesser amount --
7.7 percent -- because the housing finance board asked them
to. The board said it had overestimated the average home price
in 2003, so last year's increased conforming limit shouldn't
have been as big as it was.
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 Federal Housing Administration is expected
to update its loan limits soon. The base FHA loan limit in
2004 is $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. You
can look up the FHA limit for a particular county on this
hard-to-find Web page: https://entp.hud.gov/idapp/html/hicost1.cfm
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