Reduced Jumbo Conforming Limit Means Higher Rates for Some Borrowers

You've most certainly heard the news. The recent savaging of equities amid increasing concern over the U.S. economy's tenuous recovery, along with the growing storm enveloping European financial markets, have all contributed to a flight to Treasuries and to some of the lowest mortgage rates in history. 30-year fixed conforming rates (supporting loans to $417,000) have broken below the 4% threshold and high balance conforming loans (currently from $417,000 to $729,750 in most Bay Area counties) are in the low 4% range. While these low rates improve the purchasing power for many buyers, the pending reduction of the high balance conforming limit to $625,500 will translate to higher payments for others. The limit reduction is set for September 30 and most lenders have already pulled the plug. (Presently, I have two investors still accepting applications to $729,750, but loans must be locked and delivered by September 15, and close no later than October 5, 2011.)

The reduction of the high balance conforming limit (also referred to as "jumbo conforming," or "super conforming") to $625,500 will mostly affect borrowers interested in properties with prices ranging from $781,875 to $912,187. Factoring in the standard down payment of 20%, these are the prices, respectively, that are supported by the new and old high balance limits. Loans above the conforming limit are referred to as non-conforming and lack support from government sponsored entities such as Fannie Mae and Freddie Mac. Non-conforming rates tend to be around 1/2 percent higher, especially for long term 30- and 15-year fixed loans. I think there's a good chance that some investors, sensing opportunity, will bridge the gap with slightly improved offerings for highly qualified borrowers. But pricing above the high balance limit will undoubtedly remain higher. 

The good news is that rates are low across-the-board, and there are excellent loans and rates in the non-conforming realm. Generally speaking, non-conforming guidelines are more demanding than are those for conforming loans. Requirements for down payment money and credit scores tend to be higher and borrowers' debt-to-income ratios (current liabilities added to the proposed principal and interest payments, plus pro-rated property taxes and insurance, divided against income) tend to be more restrictive. As always, there are exceptions to the rule. Here are current guidelines offered as a special by one investor that are extremely favorable:

Loans to $2 million (or greater) with 30-year fixed rates at no points as low as 4.875% (APR 4.913%):

• Debt-to income allowances to 50% (standard is just 40%)

• Minimum Fico credit score is 700 (standard is 720 or higher)

• CLTV to 85% (standard is 75-80%)

• Only one appraisal on loans to $1.5 Million (most require two)

• No pricing hit for LTVs 75-80%

Again, borrowers caught between the old and new reduced high balance limit will feel a bit of a pinch, especially with long term rates. But there are always other financing options to explore and the unusual confluence of reduced prices and historic, low rates make this a great time to buy a home.