Higher Loan Limits Back In Final Stimulus Bill

by Peter G. Miller
February 17th, 2009

Once they were out, but now they’re in. The magical system that produces legislation in Washington has now produced an economic recovery bill which once-again includes higher loan limits.

The National Association of Home Builders reports that the final legislation “will help home buyers in high-cost markets by extending the FHA, Fannie Mae and Freddie Mac loan limit of $729,750 through the end of 2009.” The current limit is $625,500.

Given that higher FHA loan limits were dropped from the bill and are now back, the obvious questions are how do such things happen and what does it mean?

The answer to the first question is that the various housing groups in Washington still have a lot of clout — the brokers, builders and lenders represent huge number of people and remain politically significant. As well, many of the lawmakers are from high-cost areas which will benefit most from the higher loan limits. They want to be re-elected.

The second question is more interesting. You can have higher loan limits but to be attractive they need to be reasonably available to qualified borrowers and high-cost loans also need to be sanely priced.

At this writing, a 30-year fixed-rate loan is priced at roughly 5.25 percent while a jumbo — a loan for more than the conventional loan limit — is at 6 percent or more.

This may seem like a small difference, but the higher rate applies to the entire loan amount, not just the cash above the conventional limit.

Let’s look at some numbers:

Smith wants to borrow $729,750 at 5.25 percent over 30 years. The monthly cost for principal and interest is $4,029.71.

Jones wants to borrow $750,000 at 6 percent over 30 years. The monthly cost for principal and interest is $4,496.63. That’s an additional annual cost of $5,603.04 ($466.92 x 12) to borrow an extra $20,250 above the conventional loan limit of $729,750. Effectively, this extra $20,250 is being borrowed at a rate of better than 28 percent.

As was the case in 2008, a lot of people will have an interest in jumbo loans — loans above the conventional loan limit — until they see the cost and until they find that the application process will require impeccable credit. Investors will likely have little appetite for larger loans, so you can guess what will happen next: Strong demand and little supply will increase the interest-rate gap between conventional loans and jumbo financing — if such financing is available.

There is a bottom line here: A lot of buyers who would like to purchase a “million-dollar home” won’t be interested if in addition to cash the financing they need exceeds $729,750.

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5 Responses to “Higher Loan Limits Back In Final Stimulus Bill”

  1. Chris Parkinson Says:

    Todays market place is not about $750,000 homes it is about HUD having lots of homes under $100,000. It is about Bank REO’s that are under $100,000. It is this realization that is in denial in the mortgage industry because of one key factor, what is you commision, what are your fees?

    I would like to see a balanced blog or article that truly represents the financial condition we are in today, and not the greed motivated discussion that is the real source of all our problems.

  2. Mark Says:

    Great post. Sometimes I don’t think people consider the difference .75% makes on the entire loan amount. Think about what a difference $500 makes in a month. Thanks for sharing.

  3. Quinton Says:

    When will HUD officially announce the new FHA loan limits from the stimulus bill. It seems like their website has not been updated for quite some time.

  4. Cameron Says:

    When will the new loan limits go into effect? I checked the HUD Website, however no changes have been made. Please advise…thansk!

  5. Clint Mize Says:

    i was told March 1st, or March 4th. Any word anyone?

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