The Federal Housing Finance Agency (FHFA) is expected to announce lower loan limits this month for Fannie Mae and Freddie Mac mortgages. Lowering the dividing line between what are known as conforming loans and jumbo loans is an effort by the government to expand the role of private capital in the mortgage marketplace and reduce the number of loans guaranteed by Fannie Mae and Freddie Mac.
The conforming loan limit sets a cap on the size of loans Fannie Mae and Freddie Mac can buy or guarantee. For most of the country the limit is $417,000 for a single family home. In more expensive markets such as San Francisco, New York City and Los Angeles the limit is currently $625,500.
No one is sure how far the FHFA will lower the loan limit which is expected to take effect January 1, 2014. This will be the first time since 1980, when the limits where put in place, that they have been lowered across the board. In 2011 loan limits for high cost areas were lowered 14.3 percent from $729,750 to $625, 500.
Those thinking about buying a home in the $400,000 to $520,000 range should prepare to pay a higher interest rate and have more cash for a down payment. For example, under the current loan limit a borrower could put 20% down payment on a $521,250 home and still qualify for a conforming loan. If the new limit is set at $375,000 the borrower will need to add $42,000 more to the down payment or go for a jumbo mortgage. Jumbo rates have historically been one quarter to one half percentage point higher than conforming mortgages.
It should be noted that the new loan limits will also apply to multi-family dwellings up to 4 units. Currently, the conforming loan limit in most of the country for a duplex is $533,850. For a triplex the limit is $645,300 and a 4-plex tops out at $801,950.