Higher Loan Limits To Boost Borrowers

Although mortgage rates have been bouncing around at or near their lowest levels in 40 years, as many as 250,000 higher-end home buyers will catch yet another break beginning Jan. 1, thanks to a pending increase in the so-called "conforming loan limit."

The new maximum on conventional home loans that can be purchase by Fannie Mae and Freddie Mac, the two federally-charted corporations that keep mortgage money flowing to local lenders, will be $322,700 next year. The current limit is $300,700.

At current rates, economists at Freddie Mac estimate that families whose loans fall within that $22,000 window will save as much as $37,700 over the life of a 30-year mortgage. That's about $105 a month.

At the same time, thousands more buyers who are having difficulty obtaining conventional financing will find it easier to qualify for mortgages insured by the Federal Housing Administration, which also will hike its loan limits Jan. 1.

But neither group of borrowers needs to wait until the New Year to apply for funding. Many lenders will put the new loan ceilings into effect sooner.

"We'll be out tomorrow," said Leo Knight of Ohio-based National City Mortgage, which has been offering conforming loans of up to $310,000 since early July in anticipation of the forthcoming increase.

Wells Fargo Home Mortgage also will be raising its conforming loan limit "right away," said spokesman Jon Ferchen, who called the increase "good news" for home buyers and home owners.

"It allows our customers to purchase a home or refinance an existing one in a wider price range and still retain the benefits of a lower interest rate," Ferchen said.

The higher ceiling on conventional mortgages isn't likely to produce many more buyers because most of those who will benefit would have gone ahead with their purchases even if their loans were more costly.

But it will "help more families across America obtain low-cost mortgage financing," said Freddie Mac Chairman Leland Brendsel.

In addition, an entire new crop of current owners whose loan balances are currently between this year's ceiling and next year's could find it beneficial to refinance.

The ceiling on mortgages backed by the FHA also will rise next year to about $280,750 in 38 high cost areas. Tthe current maximum is $261,609.

The FHA limit will be about $154,900 in most other places. But it could be somewhere in between the two extremes in about 650 communities.

FHA borrowers won't save any money because of the higher ceilings because government- insured loans aren't less expensive than conventional financing. But FHA financing is an easier-to- come-by alternative for those who can't qualify for conventional loans, so more potential buyers will be eligible.

Typically, FHA borrowers don't earn enough or carry too much debt to qualify for conventional mortgages. Their only other option is a so-called "subprime" loan, which often comes with rates that are four-to-six percentage points higher because of the greater risk to lenders these borrowers represent.

The conforming loan limit is the legal ceiling on mortgages than can be acquired from local lenders by Fannie Mae and Freddie Mac, which package the loans into securities and sell them to investors worldwide.

The two public companies guarantee the timely payment of principle and interest to investors. But because of their government connection, and the safety that link represents, investors are usually willing to accept a somewhat lower yield, which translates into lower rates for borrowers.

At the end November, the difference in rates between conforming and "jumbo" loans which exceed the Fannie-Freddie limit was 0.30 percentage points, according to HSH Associates, a Butler, N.J., mortgage information firm. But the spread can be as great as 0.75 points or as narrow as 0.10 points, depending on the lender.

Annual changes in the ceiling are based on the average price of houses nationally from one October to the next as calculated by the Federal Housing Finance Board. This week, the board reported that in October, the average rose to $235,700, a 7.33 percent increase from $219,600 a year earlier.

The FHA limit is set by law as a percentage of the Freddie Mac ceiling. It is 87 percent of the ceiling in expensive markets and 48 percent most everywhere else. Because the FHA calculates limits for more than 3,000 different jurisdictions, an official announcement regarding higher limits won't come for several weeks.

Neither Fannie Mae, Freddie Mac nor the FHA make loans directly to consumers. The government-sponsored enterprises act as middlemen to bring liquidity to the mortgage market, and the FHA insures loans made by private lenders to more risky borrowers who don't meet Fannie and Freddie's more stringent underwriting guidelines.