Mortgage News in the Carolinas
Mortgage Guidelines
Conforming Loan Limits Unchanged For 2012
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A conforming mortgage is one that, literally, conforms to the mortgage guidelines as set forth by Fannie Mae and Freddie Mac.
Conforming mortgage guidelines are Fannie’s and Freddie’s eligibility standards; an underwriter’s series of check-boxes to determine whether a given loan should be approved.
Among the many traits of a conforming mortgage is “loan size”.
Each year, the government re-assesses its maximum allowable loan size based on “typical” housing costs nationwide. Loans that fall at, or below, this amount meet conforming mortgage guidelines. Loans in excess of this limit are known as “jumbo” loans.
Between 1980 and 2006, as home values increased, conforming loan limits did, too, rising from $93,750 to $417,000. Since 2006, however, despite falling home prices in many U.S. markets, the conforming loan limit has held steady. This will remain true for 2012 as well.
In 2012, for the 7th straight year, the national, single-family conforming mortgage loan limit will remain at $417,000.
The complete 2012 conforming loan limit breakdown, by property type :
- 1-unit properties : $417,000
- 2-unit properties : $533,850
- 3-unit properties : $645,300
- 4-unit properties : $801,950
However, there are some areas nationally that have earned ”loan limit exceptions” based on the local median sales prices. These areas are known as “high-cost” areas and loan limits within these regions range from $417,001 to a maximum of $625,500.
Some examples of high-cost areas include San Francisco (along with a most of California), New York City, and most of Hawaii and Alaska. Nationally, there are approximately 200 such “high-cost” areas. There are not any high cost areas in the Charlotte area.
Conforming Loan Limits Drop In High-Cost Areas
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For homeowners in high-cost areas nationwide, conforming and FHA loan limits have dropped by as much as 14 percent.
Effective October 1, 2011, the temporary mortgage loan limits that allowed for non-jumbo loan sizes of up to $729,750 are no longer.
$729,750 is above the “normal” loan limit of $417,000.
The elevated limits were put in place in 2008 as the economy and financial sector entered its crisis. At the time, there was little private money to serve buyers and would-be refinancers whose loan sizes exceeded Fannie Mae and Freddie Mac’s maximum $417,000 loan limits.
For most people whose loan sizes exceeded that threshold, mortgage financing was unavailable. There were no lenders to back the loan size.
This was of particular importance in places such as New York City, Los Angeles and Washington, D.C. where home prices routinely top $1 million. For people in these areas, unless they had a downpayment that could lower their respective loan sizes to $417,000 or lower, mortgages were mostly unavailable.
Congress recognized this and, as a result, gave Fannie Mae and Freddie Mac temportary authorization to purchase and securitize home loans of up to $729,750 in value, depending on where the subject property was located.
The program helped housing, leading Congress to pass more permanent, location-specific loan limits. Later that same year, Congress passed the Housing and Recovery Act of 2009 which, in part, made high-cost loan limit pricing permanent, albeit at $625,500.
The $729,750 temporary limits expired Friday, September 30, 2011. Today, the maximum allowable conforming loan size is $625,500.
If you live in a high-cost area, therefore, take note. Mortgage rates may be low, but the amount of loan for which you qualify may be less than you expect, and you may find yourself ineligible.
The complete list of high-cost areas is available online.
After A Pause, Mortgage Guidelines Resume Tightening
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Mortgage guidelines appear to be tightening with the nation’s largest banks.
In its quarterly survey to senior loan officers nationwide, the Federal Reserve uncovered that a small, but growing, portion of its member banks is making mortgage approvals more scarce for “prime” borrowers.
A prime borrower is described as one with a well-documented payment history, high credit scores, and a low monthly debt-to-income ratio.
Of the 53 responding “big banks”, 3 reported that mortgage guidelines “tightened somewhat” last quarter. This is a tick higher as compared to prior quarters in which only 2 banks did.
46 banks reported guidelines unchanged from Q1 2011.
When mortgage guidelines tighten, it adds new hurdles for would-be home buyers in Charlotte. Tighter lending standards means fewer approvals, and that can retard home sales across a region.
Just don’t confuse “tighter standards” with “oppressive standards”.
While it is more difficult to get approved for a purchase home loan in 2011 as compared to 2006, the same basic rules apply:
- Show that you have a history of paying your bills on time
- Show that your income is sufficient to cover your obligations
- Show that you can make a downpayment
And the good news is that, once approved, you’ll benefit from some of lowest mortgage rates in history.
Last week, the average 30-year fixed mortgage was below 4.250% for buyers willing to pay points, and the average 5-year ARM was below 3.000%. The 15-year fixed rate loan was similarly low.
For as long as delinquency rates remain high, expect mortgage guidelines to continue to tighten through the rest of 2011 and into 2012. Therefore, if you’re a “fringe” borrower looking at a purchase in the fall or winter season, consider moving up your time frame. Changing guidelines may render you ineligible for a mortgage.
Is An FHA Mortgage Better Than A Conforming One?
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The FHA is insuring a greater percentage of loans than during any time in recent history. In 2006, it insured roughly 5 percent of the purchase mortgage market. Today, it insures one-quarter. ”Going FHA” is more common than ever before — but is it better?
The answer — like most things in mortgage — depends on your circumstance.
Like its conforming counterpart, an FHA-insured mortgage is available as a fixed-rate loan and as an adjustable-rate one. Payments are made monthly and come without prepayment penalties.
That’s where the similarities end, however, and decision-making begins. For homeowners and buyers across Charlotte , FHA mortgages carry a different set rules as compared to conforming loans through Fannie Mae or Freddie Mac that can render them more — or less — attractive for financing.
For example:
- FHA mortgages can be assumed by a subsequent buyer. Conforming loans may not.
- FHA mortgages require mortgage insurance, regardless of downpayment. Conforming loans do not.
- FHA mortgages do not have loan-level pricing adjustment. Conforming loans do.
FHA mortgages also require smaller downpayment requirements versus a comparable conforming mortgage. FHA calls for a minimum downpayment of 3.5%. Conforming mortgages often require 5 percent or more.
And, lastly, FHA mortgages are priced differently from conforming ones. Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than 50% of the time, meaning that an FHA mortgage’s principal + interest payment is lower than a comparable Fannie/Freddie loan.
Today, conforming mortgage rates are lower.
So, which is better — FHA loans or conforming ones? Like most things in mortgage, it depends. FHA-insured loans can be big money-savers or money-wasters. To find out which is best for you, ask your loan officer for today’s market interest rates and study the results.
With less than 20% equity, the answer is often clear.
