The Stimulus Bill & Increased Conforming Loan Limits

There is an element of the Stimulus Bill that will temporarily raise the conforming loan limits from $417,000 up to $729,950. Why "up to" and not just "to" almost $730,000? FHA (the Federal Housing Authority) will base the new limit by location. It will be based on 125% of the median home price with a maximum of $729,950.

The idea is that the traditionally lower conforming interest rates combined with higher limits (through the end of 2008) will help stimulate the economy. Those of us in the real estate world have all been excited by this proposal -- a nice jump to our slowed industry.

The primary question I'm hearing from my clients is "When?" When will buyers & home refinancers benefit from the increased limits? Good question.

Here's the deal: FHA had 30 days from when Bush signed the bill into law to set the limits. They say they'll have the new limits out the first week of March. Then what? Then Fannie Mae & Freddie Mac (the GSEs -- Government Sponsored Enterprises) will make their adjustments. Once they make their adjustments to not only the limits, but likely to the guidelines for borrowers things will trickle down to the big banks (BofA, WaMu, Wells, etc.). I've heard another 2 months at most, but no one really knows. We're all hoping for sooner (fingers crossed).

More things that no one really knows: what's really going to happen. It's highly likely that here in the Bay Area we'll get the maximum new conforming loan amount (that $729,950), but will the interest rates for loans at $400,00 be the same as those at $550,000? $700,000?

Fannie Mae is pretty fair in how they charge borrowers for added risk. You want to state your income and not have it verified? Okay, but we're going to charge you a slightly higher rate for it. You want a loan and your credit's not so hot? Well, okay, you still fall in the "okay" zone so we'll lend to you, but we're going to have to charge you a higher rate. Basically, if you represent a larger risk as a borrower, you can still get the money, but it'll cost you.

So, going back to the higher limits. Doesn't a $700,000 loan represent a higher risk than a $400,000 one? There's more to lose, right? Does it not stand to reason that if you want a loan that benefits from the increased limits that you may be charged a little more? But again, who knows how, or if, that will be accounted for.

I would love to see our high cost area get a small break for home owners and home buyers. It's about a 1% difference in rate, which can make a big difference. Don't think we're going back to the days of less cost equals more house (like with interest only and pick-a-pay loans). The banks are going to stay tight on qualifications and down payments for the time being.

My point is this: Don't base your actions on the idea that the increased conforming loan limits will be your saving grace. The fact is that no one knows exactly what is going to happen. I've heard a lot of talk going around. I've heard mortgage brokers (not with my company, of course) telling people that as soon as the Stimulus Bill is passed they'll be able to get a $700,000 loan for under 5%. Now that's just not true...it could end up being factual, but at this point don't believe it as fact. Do your research and ultimately make the decision that's best for you & your situation today and tomorrow. And if you need information specific to your situation, leave a comment & we'll talk.