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Posted 01/19/2016

“Expensive” Homes Easier To Mortgage Under New Mortgage Rules

2016 Conforming Loan Limits

Now: Cheaper Loans For "Jumbo" Homes

For buyers in high-cost parts of the country, mortgage financing is getting both cheaper and easier.

A new Fannie Mae policy expands access to the popular High-Balance Conforming Loan program, which helps home buyers whose loan size exceeds the national conforming loan limit.

With the updated program, loan costs have reduced and standards for qualification have relaxed.

For home buyers in cities such as San Francisco, California; Seattle, Washington; and Montgomery County, Maryland, the changes land with excellent timing -- home values are rising nationwide and the market for new homes is competitive.

Since 2012, home values are up more than 30% nationwide, helping the typical homeowner to fully-recover whatever home equity losses may have been incurred during last decade's downturn.

Today's housing market is a seller's one.

More than 6 million homes will sell this year and the supply of homes remains tight. Demand from repeat buyers is high and first-time home buyers now account for close to one-third of the overall market.

However, with rents projected to rise (again) in 2016, and with current mortgage rates near all-time levels, the percentage of first-time buyers in the market could increase.

Rising demand for homes amid shrinking inventory will push home prices higher into 2016, which is why it's timely that the government is loosening its high-balance loans standards.

For buyers in high-cost cities, it will be easier to secure a low-interest rate loan.

Click to see today's rates (Dec 8th, 2016)

How Does The Mortgage Market Work?

The U.S. mortgage market is among the most efficient mortgage markets in the world.

It was created in 1934 and is made possible, in large part, by the government agencies which securitize mortgage loans into mortgage-backed securities.

More than 90% of the mortgage bond market flows through U.S. government agencies.

The four biggest agencies are Fannie Mae and Freddie Mac, which back conforming loans; the Federal Housing Administration (FHA), which backs FHA loans; the Department of Veterans Affairs, which backs VA loans; and, the U.S. Department of Agriculture, which backs USDA loans.

The government "backs" mortgages in a number of ways.

The FHA, for example, provides mortgage default insurance to lenders, which is paid for by the borrowers in the FHA program. By contrast, the VA guarantees its loans against default for lenders, with claims paid for by the agency itself.

Fannie Mae and Freddie Mac provide no such insurance at all. They exist to "free up" capital for lenders making loans.

The agreement that Fannie Mae and Freddie Mac have with mortgage lenders is that they will purchase any mortgage loan from a bank's holding so long as that loan meets certain minimum standards.

The "minimum standards" of Fannie Mae and Freddie Mac encompass all aspects of a loan.

For example, Fannie Mae and Freddie Mac require that the subject property not be more than 4 units; and, that the mortgage borrower has a certain minimum FICO score; and, that the loan-to-value of the home remains within certain limits.

The entities also enforce a maximum loan size, and that's what brings us to the discussion on high-balance loans.

Look up your area's mortgage loan limit here.

What Is A High-Balance Loan?

Fannie Mae and Freddie Mac enforce a maximum loan size for all backed loans.

Loan size limits are based on the value of a "typical" U.S. home and, over the last three decades, as the U.S. housing market expanded, loan size limits expanded, too.

In 2006, at the peak of last decade's housing rally, Fannie Mae and Freddie Mac set the loan size limit for a 1-unit homes to $417,000.

Then, the market changed.

Beginning in 2007, loan defaults increased and the banking system faltered. Foreclosures became prevalent and mortgage lenders failed.

In response to the worsening market climate, mortgage lending tightened which, predictably, led to new foreclosures, which led to additional mortgage tightening, which led to more foreclosures, et cetera.

For borrowers on the margin, getting approved for a mortgage proved difficult which is one of the reasons why Fannie Mae and Freddie Mac held the national conforming loan limit as-is.

Officials wanted to keep mortgage credit available during such as a crucial period for U.S. housing.

Then, to reinforced this point, in 2009, Fannie Mae and Freddie Mac introduced the idea of "high-balance" loans; loans which exceed the national conforming loan limit for borrowers in high-cost parts of the country.

The creation of high-balance loans was crucial to markets such as Orange County, California; Loudoun County, Virginia; and New York City's five boroughs.

Because jumbo mortgage lending had dried up -- an effect of the housing market's downturn -- mortgage loans were mostly out-of-reach in cities where homes were "expensive".

If you purchased a home for $700,000, for example, you had a choice. You could put down close to $300,000 in order to get a loan within the conforming loan limits; or you could not buy the home.

Fannie Mae and Freddie Mac's high-balance mortgage loan changed that.

By allowing loan sizes of up to $625,000 in certain high-cost cities, the agencies' High-Balance Conforming Loan program kept the housing market moving and played a role in its recovery, which began in late-2011.

The baseline conforming loan limits are currently :

  • 1-unit home : $417,000
  • 2-unit home : $533,850
  • 3-unit home : $645,300
  • 4-unit home : $801,950

For high-balance loans, limits increase to :

  • 1-unit home : $625,500
  • 2-unit home : $800,775
  • 3-unit home : $967,950
  • 4-unit home : $1,202,925

There are currently 234 designated high-cost areas nationwide.

Click to see today's rates (Dec 8th, 2016)

Eligibility Standards For High-Balance Loans

The High-Balance loan program was first introduced in 2009, and the program has been a success.

Fannie Mae and Freddie Mac have backed mortgage loans for borrowers who would have been unable to get financing otherwise, and have enabled those borrowers to receive excellent loan terms from their lenders.

Now, after 6 years of running the program, the agencies are making it easier to get mortgage-qualified.

Mortgage standards for the High-Balance Loan Program are relaxing, and borrowers in high-cost areas should get access to lower rates because of it.

The changes make the High-Balance Conforming Loan behave more like a "standard" conforming loan.

The first big change is that high-balance borrowers are no longer required to bring 5% of their own funds to the closing when the loans is 80% LTV or less. Down payments can be fully funded via gifts or grants.

The second big change is that condominium loans no longer require two comparable sales from outside the building or project. This is an especially important update for buyers in Boston, Los Angeles, and San Francisco where condominiums regularly sell for more than the national conforming loan limit.

Third, loan-to-value limits have been increased.

High-balance loans now allow up to 95% LTV on a fixed-rate loan; and 90% LTV for an ARM (which may not be such a bad idea).

You can also use the High-Balance Conforming Loan for second homes and investment properties.

What Are Today's Mortgage Rates?

For buyers in high-cost housing markets, the changes to the High-Balance Conforming Loan program make it easier to get qualified, and with access to lower rates.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Click to see today's rates (Dec 8th, 2016)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2016 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)