Jumbo Loans Are On the Way Out.

What is a jumbo loan?
By current definition, a jumbo loan is one that is greater than $417,000 for a single unit property. Fannie Mae and Freddie Mac are prohibited by federal law from buying such mortgages due to the perceived risk associated with them. The result is that lenders charge a premium for issuing those loans, sometimes as high as a full percentage point over loans under $417,000 also known as conventional mortgages. The jumbo and conventional loans limits have remained unchanged for the last three years while property prices have skyrocketed before the current slump.

In certain areas of the country where the median price is $440,000, all loans are jumbos. Around the country borrowers are hard pressed to find lenders who would issue jumbo loans, those who do charge a high premium. Is there a solution in sight for these borrowers? The answer lies in part within the recent stimulus package.

Stimulus Package Mortgage Provisions.
While most people think of the stimulus package uniquely in terms of rebate checks, there are two provisions that address mortgages:

One is the increase of FHA insured mortgages limits: this government program that has been in existence since 1934 has insured over 34 million loans since. Initially designed to assist modest buyers, this program has evolved into an important player by covering more affluent buyers over the years. Its drawbacks have been the modest limits that it could insure. The combination of requiring a modest down payment (3%), full documentation , limited to owner occupants and the relative low amounts caused it to be eclipsed by subprime loans.
By increasing the limits to 125%* of the median property price in the area, it will be able to insure more home mortgages. In cook county, IL. the current limit for a single unit is $275,200, with the new program, this could rise to $344,000!

The other increase temporarily the limits of mortgages that Fannie and Freddie can purchase: a 125%* increase of the current $417,000 limit could bring this amount to $521,250. This will basically eliminate what is characterized as jumbo currently and bring in more borrowers and hopefully create some savings.

Let's take a $500,000, 30 years fixed mortgage at 7% interest rate, the principal and interest (P&I) is $3,326.51. If the same mortgage were priced at 6%, the monthly (P&I) would be $2,997.75. The savings would be $328.76, not such a negligible amount. Obviously those savings will be higher if the current rate were higher but the greater benefits will come from the fact that there will be more lenders willing to make mortgages.

A Word of Caution about Refinancing.
Unlike purchases where the value is is set by today's market, refinancing involves a existing mortgage and a current appraisal. Due to declining valuation, some home owners may not be able to take advantage of these provisions. Some reports indicate that up to 10% of the total mortgages may be higher than the properties used as collateral! (underwater) For those who are lucky to have some equity, credit, income and assets, the stimulus package may just be what the Doctor ordered.

Don't be shy, ask me any questions about these and any mortgage related issues that you may have at info@p2funding.com
*Note: the increase ranges from 125% to 175% of the median home price.