SANTA CRUZ (November 28, 2009) - Each November Fannie Mae and Freddie Mac, the nation’s largest investors in home loans announce the maximum loan amounts that they will accept for the coming calendar year. This limit is called the conforming limit and is traditionally based on the median price of a home, nationwide. We can thank Freddie and Fannie for historically offering the lowest 15 and 30 year fixed rate mortgages throughout the United States. Historically, loan amounts above the conforming limit are called jumbos and are placed by other investors, charge higher rates and have stricter underwriting guidelines.

The conforming limit is set each November based on the average home price, nationwide, of homes sold in the 12 month period ending in October of each year. The good news is that despite the fact that home values have fallen since 2006, the base conforming loan limit has remained at $417,000 for a single family home or condominium. In fact this is the fourth year in a row the limit has remained at $417,000. Only once since 1985 has the conforming limit dropped and that was between 1989 and 1990 when the limit went down from $187,600 to $187,450. We should all consider it a gift that the limit will not drop in 2010 because if the conforming limit were to have dropped like home prices have by 25 percent or more, anyone seeking a loan amount above about $300,000 would be paying considerably more in mortgage interest.

To stimulate home sales and home refinancing, Fannie and Freddie created another category of loans called ‘high balance conforming’. Loan amounts between $417,000 and $729,750 fall into this category for our “high-cost area” in Santa Cruz County as defined by the Federal Housing Finance Agency. Unfortunately, these high balance conforming loans carry higher interest rates and tighter underwriting guidelines.

In February, 2008, the Bush Administration’s Economic Stiumulus package increased the maximum FHA loan amount from $362,000 to the present day limit of $729,750. FHA loans currently follow these same loan amounts and are scheduled to maintain the same schedule throughout 2010.

The conforming loan limits for both FHA and conventional loans are higher for multi-residential properties: for 2 units, the high balance limit is $934,200, for 3 units it is $1,129,250 and for 4 units it is $1,403,400.

Due to the higher cost of homes in Alaska and Hawaii, the conforming loan amounts are 50 percent higher there. If California were included in that same ‘expensive home’ category (as it should be!), home loans would be even cheaper for thousands of California homeowners.

While rates remain at near historically low levels, we expect the underwriting guidelines for Fannie and Freddie and FHA loans to be tightening in the coming year which will, without a doubt, prevent some prospective homebuyers from being able to take advantage of today’s home prices.

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.