Make the new mortgage limits work for you
By Michael D. Larson • Bankrate.com

Hey, home buyers: Don't touch that dial just yet!

Every new year brings with it updated mortgage rules, loan limits and government programs that can make it a little easier and cheaper to get into a home. By shopping real estate now -- but not getting loans until Y2K -- consumers can take advantage of the way the system works to get the best possible deal.

"January 1 is a convenient time for these various triggers and whatnot to go off," says Bud Carter, senior director of residential finance for the Mortgage Bankers Association of America in Washington.

"It might actually be a good time of year to buy."

Consumers benefit from patience
That advice contrasts with the typical "Buy Now!" message pumping over the airwaves before the Christmas holiday passes by, but experts say it makes sense. First-of-the-year changes are familiar to lenders, yet many consumers don't understand they can benefit by exhibiting a little patience when shopping for a loan.

Conforming first mortgage loan limits

"Lenders kind of get used to the changes that occur and they kind of anticipate them," Carter says. But they "do encounter some people who get a little confused.

"They have to continue to have a good consumer education kind of approach to things."

To understand how the process works, consider how Fannie Mae and Freddie Mac operate. The two agencies buy loans from lenders, but only if those loans don't exceed a certain dollar amount. The ones that fit under the dollar cap fall into the cheaper conventional or conforming category; those that don't are called jumbo mortgages.

Increasing loan limits
The limit is adjusted every year on Jan. 1 based on a federal study that measures changes in U.S. home prices. In seven of the last 10 years, the study prompted the agencies to raise their loan caps and each time they did, it allowed larger loans to fit into the conforming category. Because the survey showed that houses appreciated at an average clip of 5.3 percent this year, the cap will rise yet again in 2000.

"What has been driving the increase in housing prices is simply the overwhelming strength of the U.S. economy," says Doug Robinson, a Freddie Mac spokesman. "When you have a strong economy with real incomes going up, you have demand for housing and housing prices being bid up."

So how can borrowers take advantage of the loan limit revisions? Say a couple wanted to buy a $310,000 house with a 20 percent down payment. They would need a mortgage for $248,000. If they went out today in search of a loan, however, they would likely need a jumbo one because Fannie Mae and Freddie Mac won't buy mortgages for more than $240,000 until next year.

Jumbo loans are more expensive than conventional ones. The average 30-year fixed rate jumbo loan had a rate of 7.94 percent on Dec. 10, while the average conforming loan had a rate of 7.61 percent, according to Bankrate.com data. As a result, the couple would end up paying almost $60 more a month for principal and interest if they got a loan before the first of the year. Assuming they made no prepayments during the life of the mortgage, it would cost a little more than $20,000 additional in interest, too.

"Toward the end of each year, those people who might be on that bubble, many times they get to take advantage of an increase" in the limits, says Alan Cohen, a branch manager for Irwin Mortgage Corp. in Indianapolis. "They can take advantage of the lower interest rates."

Wait for the new caps to take effect
Though some lenders may already be making loans for formerly jumbo amounts at conforming rates, experts say most won't until the new caps take effect. Borrowers who want to buy with mortgages between $240,000 and the 2000 limit of $252,700 should therefore wait until the new year to draw up any loan documents.

The same holds true for consumers who are just barely priced out of the market for Federal Housing Administration loans backed by the Department of Housing and Urban Development. These mortgages have looser qualifying guidelines than conventional loans, but have lower limits on how much can be borrowed.

Consumers who want to wait until the new year for an FHA loan have to be a little more careful than their conventional brethren, however. HUD sets limits that vary from state to state, county to county and even city to city. Plus, it doesn't announce its new caps in advance. That means some guesswork is necessary.

If someone needs a loan for only slightly more than the 1999 limit and home prices have been relatively stable in the neighborhood, for example, it's a safe bet that FHA mortgages will be available there in 2000. But if prices have fallen, HUD may end up adjusting the limit downward in that area, leaving someone unable to get a loan for the amount needed. Real estate agents can give buyers an idea about sales trends in their area. To find out what today's FHA limits are, borrowers can check HUD's localized search engine.

"We don't announce a month in advance because we have to spend some time doing the calculations," says Chris Walz, a HUD spokesman. Lenders "could theoretically do some guesstimating, but they can't do loans based on the new numbers until Jan. 1."

High cost loan definition updates
Mortgage limits aren't the only things that change at the stroke of midnight. The government also adjusts its definition of a high cost loan at that time each year, and lately the revisions have allowed lenders to earn a little more from their customers without facing additional restrictions.

How? The Home Ownership and Equity Protection Act of 1994 restricts lenders who make loans with total points and fees that exceed a certain dollar amount. With those loans, the lenders have to meet certain additional hurdles that don't apply to regular mortgages. They have to weigh the borrower's ability to repay the loan, not just the equity available to tap, abstain from charging most prepayment penalties and provide additional disclosures before closing.

Trouble is, the Federal Reserve Board adjusts its high cost loan trigger each January based on the year-over-year change in the Consumer Price Index the previous spring. Since that inflation measure has risen steadily in the second half of the 1990s, so has the high cost threshold. It climbed from $400 originally to $441 this year and will rise to $451 in 2000.

There isn't much that consumers can do to take advantage of this situation. But people who want to get the best deal either need to shop around for a lender who truly is low cost or borrow by Dec. 31.

Good time for grants, too
Consumers who need even more assistance than FHA loans can provide also should pay attention the next couple of weeks. That's because programs designed to help low-income borrowers, buyers willing to move to distressed areas and other special-needs shoppers sometimes receive money just once a year. If too many consumers come looking for help in the first quarter, some are turned away. By getting to the appropriate nonprofit group or state or local housing authority early, they can avoid the problem, says Cohen, the Indiana mortgage manager.

"There may be certain grants from neighborhood associations, etc. that may only have $5 million to work with through the whole year. They may run out."

Regardless of their situation, Cohen adds that potential borrowers should look upon Jan. 1 as an opportunity to reassess what they want and how to get it. At the very least, they might find a lender who's made a New Year's resolution to provide hassle-free, cheap service that way.

"It always helps new buyers out looking in the market to update and see what might be new and available the first of every year."