You may have heard that the maximum loan limits on Fannie/Freddie and FHA jumbo mortgages recently dropped. If you're looking to take out or refinance a high-value mortgage, what does that mean for you?
Basically, it depends on where you live and how much you want to borrow. For most of the country, there'll be no impact at all - the reduction in Fannie Mae and Freddie Mac jumbo loan limits only affects about one-quarter of the counties in the U.S., areas with relatively high property values. The FHA reductions are more widespread but will likely have less impact, because FHA loans are less frequently used by high-value borrowers.
New, old limits by county
Borrowers who exceed the new loan limits will have to resort to the private jumbo mortgage market, where rates typically run about half a percentage point higher than on agency backed loans, unless they can bring enough money to the table to qualify under the lower limits. Private jumbo loans also usually require at least a 20 percent down payment, while agency loans are more flexible in that regard.
In some areas, the new limits are only a little bit lower than the old ones, so the impact will likely be minimal, while in others, the reductions are substantial - close to a quarter million dollars lower.
Little or no impact for most borrowers
Here's what happened: Effective Oct. 1, Congress rolled back the maximum loan limit on Fannie, Freddie and FHA-supported mortgages to $625,500, down from $729,750. Those limits apply in only the highest-priced real estate markets in the country; in other areas, the limits are as low as $417,000 for mortgages backed by Fannie Mae and Freddie Mac (together known as the government-supported enterprises, or GSEs) and $271,050 for FHA mortgages.
Don't kick yourself if you think you just missed the deadline by a few days; most lenders effectively implemented the new limits one to two months ago, to avoid getting caught by the deadline.
For much of the country, there's been no impact at all. About three-quarters of U.S. counties were already at the $417,000 standard upper limit for Fannie/Freddie mortgages, and 40 percent were at the $271,050 standard upper limit for FHA loans, and are seeing no change.
Some reductions are minimal, others major
Where the change is occurring is in the areas where the agencies have been allowed to issue jumbo mortgages in excess of those limits. The reductions are uneven, though - most areas with jumbo limits were already below the maximum, and some are seeing reductions of as little as $3,000, so the impact is minimal.
Others though, have seen a huge change, which will significantly impact homeowners seeking to obtain or refinance high-value mortgages. In Monterey County, Calif., for example, the loan limit for both GSE and FHA mortgages was reduced from $729,750 to $483,000, a reduction of $246,750. Many other counties have seen reductions of $100,000 or more - and not all of them were at the highest limit to begin with.
FHA option reduced for those with limited equity
Most of the attention is being focused on the reductions in GSE loan limits, because FHA mortgages are less popular with high-value borrowers because of the additional fees they charge. However, one group that will be particularly hurt by the new limits are high-value borrowers with little equity in their homes who need to refinance. For this group, an FHA refinance be an attractive option because the FHA allows refinancing at as much as 97.75 percent of the property value - and you don't need to presently have an FHA mortgage to qualify.
To compare the new versus old limits in individual counties, see here for GSE loans and the table at the end of this report for FHA loan limits.