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Expiration of conforming loan limits is going to cost you

If your current home--or the home you are buying--is in a designated "high-cost" area, keep an eye on your calendar. Effective October 1, 2011, the temporary conforming loan limits for your area will expire.

What are "conforming loan limits"?

Of all the various mortgage types available to homeowners and homebuyers, it's the conforming mortgage market that often offers the lowest mortgage rates around. A conforming mortgage is one that (literally) conforms to the guidelines of Fannie Mae or Freddie Mac.

Conforming limits

Mortgage guidelines are an underwriter's rule book; and with respect to conforming loans, underwriters have lots of rules to follow. Fannie Mae's mortgage guidelines, for example, total 1,253 pages.

Among its rules is the "loan limit": the maximum dollar amount allowed for a Fannie Mae or Freddie Mac-securitized mortgage. Loan limits are defined in Fannie and Freddie's respective charters, and amended by Congress annually.

Since 2006, the typical conforming loan limits have been unchanged in the Continental U.S.:

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

Loans too large for those limits are known as "jumbo" mortgages. Jumbo mortgages tend to carry higher rates and fees compared to an otherwise comparable conforming loan.

As this is written, the interest rate for a 30-year fixed-rate jumbo mortgage is 5.32 percent. The 30-year conforming fixed-rate mortgage comes in at 4.81 percent. On a $700,000 home loan, that's a monthly difference of nearly $220.

"High-cost areas" have higher loan limits

In some parts of the country, though, conforming loan limits are higher, currently ranging from $417,000 to $729,750. This is a byproduct of 2008's economic stimulus programs.

First, in February of that year, the Economic Stimulus Act set a temporary, 1-unit conforming loan-size limit of up to $729,750 in "high-cost areas." Then, five months later, the Housing and Economic Recovery Act raised the floor to $625,500 on a permanent basis, where high-cost is defined as counties and municipalities in which the median home price considerably exceeds the national average.

By home type, the temporary high-cost limits as set by Congress are:

  • 1-unit home: $729,750 loan limit
  • 2-unit home: $934,200 loan limit
  • 3-unit home: $1,129,250 loan limit
  • 4-unit home: $1,403,400 loan limit

These temporary limits expire in October 2011.

Time is running out if you live in a high-cost area

The changes to Fannie Mae and Freddie Mac's charters give homeowners in high-cost areas--including Washington, D.C. and San Francisco--access to the same low, conforming mortgage rates as homeowners in less-expensive cities such as Cincinnati.

In order to determine whether you live in a high-cost area, view this government spreadsheet which lists each county and its respective limits.

If you live in a high-cost area, look out. As of May 2011, a $925,000 home purchase needs a 21 percent down payment to keep it within conforming loan limits. After October 1, 2011, that figure will jump to 33 percent. It is an out-of-pocket cash difference of $104,250 to get access to the best rates in the market.

You can limit your financial exposure by planning ahead.

About the author:

Dan Green is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. Dan serves high-cost loan limit areas and speaks to national audiences about mortgage rates and the mortgage market. Follow him on Twitter at @mortgagereports.

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