Conforming jumbo loans are about to get a lot smaller - and that could make it harder and more expensive to buy a home or refinance a mortgage if you don't act soon.

It's been widely reported that Fannie Mae, Freddie Mac and the FHA are all lowering their conforming loan limits, effective Oct. 1. What's gotten less attention is that the size of the reductions will vary widely, depending on where you live - from a few hundred dollars in some areas to nearly a quarter million dollars for homebuyers and mortgage refinancers in Monterey County, Calif.

To be sure, most of the country will be unaffected by the changes - the reductions only apply to certain high-value markets where loan limits were raised in 2008. But if you're looking to purchase or refinance a home with a mortgage in the $300,000-$700,000 range, you could be affected.

Higher interest rates, bigger down payments

For those who are over the new limits, it will mean having to go through the regular jumbo loan market rather than getting a mortgage backed by Fannie, Freddie or the FHA. That means paying about half a percent more in interest that would be available with a Fannie Mae or Freddie Mac mortgage, or having to put up considerably larger down payment than the 3.5 percent minimum allowed by the FHA.

Currently, the biggest mortgage you can get with Fannie Mae, Freddie Mac or FHA backing is $729,750, if the home you're financing is in one of the nation's priciest real estate markets. As of Oct. 1, that limit will fall to $625,500.

Areas with loan limits less than the current maximum will generally see smaller declines for mortgages backed by Fannie Mae and Freddie Mac, though none will have new loan limits set below the current minimum of $417,000.

Smaller FHA mortgages

For FHA mortgages, the picture is a bit more complicated. The new minimum loan ceiling will be only $271,000. That's only a bit less than the current minimum in many areas, but the reductions will be applied more unevenly. Some areas where you can presently get an FHA mortgage in the mid-$400,000 range will see their FHA loan limits cut to the $271,000 minimum, whereas others with higher current limits will see far more modest reductions.

Generally speaking, the decline in FHA loan limits will depend on how home values in a given area have declined or held their value over the past few years.

More impact seen from Fannie, Freddie loan limits

Most analysts expect the new limits on Fannie Mae and Freddie Mac mortgages to have the biggest impact, since FHA mortgages carry higher fees and costs, so borrowers are less likely to use them to buy more expensive homes. However, they do hold some appeal for homebuyers who wish to buy a higher value property with a small down payment.

The reduction in Fannie Mae and Freddie Mac limits will also affect refinancing - you'll no longer be able to refinance with a mortgage backed by Fannie or Freddie if you're over the limit, even if one of them currently has your mortgage. The change won't affect FHA streamline refinances, however - you'll still be able to refinance a current FHA mortgage into a new one, even if you're above the new limits.

Published on August 6, 2011