Thanks to the Housing and Economic Recovery Act of 2008, the description of “conforming” loans has been edited to reflect changes in the economy, to better protect both home buyers and those in the lending industry. These changes include separate loan limits for regular areas and high-cost regions, allowing buyers to take on larger loans in wealthier areas without sacrificing low interest rates. This is especially important information if you are looking to purchase property or refinance in one of many more-expensive-than-average cities or counties.
The new conforming loan limits do not apply to second mortgages or home equity loans, as these tend to be smaller and more secure in and of themselves. However, if you are looking at real estate with the intention of buying new property – or if you have not altered or refinanced your current situation since last November, it is worth checking out the new limits for your county or region.
In order to understand why this is beneficial for buyers, it is important to comprehend the basics of conforming loan limits and how they are used to determine interest rates for first mortgages. First, get to know the agencies involved: Fannie Mae (the nickname for the government-sponsored enterprise formally known as the Federal National Mortgage Association) and Freddie Mac (formally the Federal Home Mortgage Corporation) are two lending giants that operate in the United States as a national bank of sorts, providing smaller lenders with the money to loan to home buyers like yourself. Their regulating agency, The Office of Federal Housing Enterprise Oversight (OFHEO), determines the qualifications for conforming loans. Freddie Mac and Fannie Mae then use those limits to decide how much money they will lend to buyers or guarantee for privately-lending banks.
Mortgages that exceed the limits set by OFHEO are referred to as “jumbo mortgages.” They are seen as riskier than conforming loans, and they are also subject to higher interest rates than their less-risky counterparts. Before the passage of the Housing and Economic Recovery Act of 2008, limits were divided into two categories only: a lower amount for properties in the contiguous United States, including Washington, D.C. and Puerto Rico, and a higher amount for Alaska, Guam, Hawaii, and the U.S. Virgin Islands.
While there is still a divide for those first two categories, there are now also more specific state, county, and regional differences, allowing for the fluctuation of property prices throughout the continental United States. These differences allow buyers in more expensive areas to finance larger amounts without facing penalties like higher interest rates. You can even calculate the conforming loan limits for your area online – if your mortgage exceeds the previous limits but not the new ones, we highly recommend that you consider refinancing for more favorable rates and terms.
In the event that the size of your loan still exceeds your local limits, it is advisable that you hold off on buying property until you can make a larger down payment or use a secondary financing source to bring your mortgage back into conformity in order to save money. By requesting a quote from our lenders, you can evaluate your options and determine the best way to save on a new loan or refinance.