SANTA CRUZ (May 23, 2009) - In an attempt to stimulate the economy by encouraging home ownership, the Obama administration has delivered a trio of gifts. Just this month it was announced that Freddie Mac and Fannie Mae have now increased their maximum loan amounts from $625,500 to $729,750. Although it is a temporary increase, it will be welcomed by many in Santa Cruz who either want to buy or refinance a home. Falling within the loan amounts accepted by Freddie and Fannie is a good thing because it means that mortgage rates are much lower and underwriting criteria is much easier than can be obtained for the previously popular ‘jumbo’ loans.

The true, base conforming loan amount for all of the United States (except Alaska and Hawaii) remains at $417,000. That conforming loan limit has been the traditional maximum loan amount that Freddie Mac and Fannie Mae will finance for single family residences. The loan amount increase for multi-unit properties; for example, the conforming loan amount rises to $801,950 for a four plex. This limit is adjusted each fall and is based on the average price of a home in the United States for the previous 12 months. Based on the fact that home values have been falling for the past two years, the $417,000 conforming limit should actually be decreasing, not increasing.

However, in order to help as many homeowners as practicable and to encourage home purchases the federal government has mandated that Freddie and Fannie temporarily increase the maximum loan amount that they will accept. President Bush first raised the limit to $729,750 for Freddie and Fannie as well as FHA back in February, 2008. The present administration has extended these temporary increases through 2009.

Unfortunately, the rates and underwriting guidelines for the loan amounts between $417,000 and $729,750 are not as friendly as for loan amounts under $417,000. Although there is typically just one quarter to one half of a percent difference in rate, the underwriting guidelines are much more restrictive. For example, the debt-to-income ratio may go up to 65 percent for loan amounts under $417,000 but is restricted to 50 percent for the larger loan amounts. In order to generate cash from a refinance, the loan-to-value ratio must be under 60 percent for loans above $417,000 but can go up to 80 percent for lower loan amounts.

The biggest gift of all is low mortgage rates. The Federal Reserve has been on a campaign to lower mortgage rates by buying mortgage-backed securities as well as treasuries. As a result, the current 30 year fixed rates are being held artificially and temporarily low. These rates have remained under 5 percent and are at historical lows right now.

Homebuyers buying their first homes must not forget to take advantage of the $8,000 tax credit being offered. To qualify, you must not have owned a principal residence for the past three years and if you make over $75,000 or as a couple, make over $150,000, the tax credits phase out. Check with your accountant for details.

All three of these gifts are temporary and are scheduled to go away by the end of the year. I know I am sounding like a broken record when I say that this is a golden opportunity for both homeowners wanting to lower their payments and for anyone who is considering buying a home. At the very least, give your mortgage professional a call and find out what your options are in today’s favorable environment.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.