Borrowers will be able to take out a substantially bigger home loan backed by Fannie Mae and Freddie Mac next year, thanks to a 6.8% increase in home prices nationwide.
The two government agencies will raise the maximum-size loan they can guarantee on a single-family home or condo by 6.8% next year — to $453,100 from $424,100 in most parts of the country, and to $679,650 from $636,150 in high-cost areas, including most Bay Area counties.
That's the biggest jump in the so-called conforming loan limit since 2006, when the nationwide limit rose to $417,000 from $359,650. As home prices plunged, it remained stuck at $417,000 until this year, when it rose to the current $424,100.
Starting in 2008, Fannie and Freddie allowed higher limits in certain high-cost areas. In those counties, the limit is based on the area’s home prices, but it still cannot exceed an overall limit, which will be $679,650 next year. That will be the max in all Bay Area counties except Sonoma, where it’s going to $648,600 and Solano, where it will hit $460,000.
The agency's regulator sets the limit each year based on the average change in the nationwide home price since the previous year. It’s higher for homes with two to four units.
The increase will benefit many borrowers who are pushing up against the current limits because Fannie and Freddie loans are generally easier to get and a little cheaper than so-called jumbo loans, which exceed the conforming limit.
The average interest rate on a 30-year fixed rate loan last week was 4.1% for conforming versus 4.14% for jumbo, according to Rachel Witkowski, a senior mortgage and housing analyst with Bankrate.com. The difference varies from week to week.
More importantly, borrowers can get a Fannie or Freddie loan with as little as 5% down. In the jumbo market, "theoretically you can find (a loan with) 10% down, but 20% is more commonplace," said Keith Gumbinger, a vice president with mortgage website HSH.com.
Also, Fannie and Freddie will guarantee loans with FICO scores as low as 620. In the jumbo market, some lenders will accept scores in the low 700s but most want 740 to 760, Gumbinger said.
In the Bay Area, jumbo mortgages accounted for 37% of home-purchase loans in September, according to CoreLogic.
Witkowski points out that the higher limits won’t help borrowers who don’t have enough income to qualify for a bigger loan.
And Gumbinger says the higher limits will give Fannie and Freddie a bigger market share at a time when Congress wants to reduce their footprint.
For Realtors, this is the best news to come out of Washington in months. "It's outstanding," said Steve White, president of the California Association of Realtors. In San Francisco, where the median price of a new or existing home is over $1.1 million, "I don't know if it will have a significant effect. But in many areas, especially the East Bay, this will allow thousands of Californians to secure a conforming loan for a new home."
The Republican tax plans, on the other hand, would limit the benefits of homeownership for some people. "Specifically the tax reform bill that passed the House is absolutely not good for California homeowners," White said.
The Federal Housing Administration is likely to announce higher limits for FHA-backed loans shortly.
Tribune Content Agency