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The conforming loan limits are changing – what does that mean and why should you care?

Good questions. First, let’s talk a little history.

The conforming loan limit is set by the Fannie Mae and Freddie Mac’s Regulator. Since 2006, the conforming loan limit has been set at $417,000. In a simple world, this is most a person can borrow and qualify for conforming (usually the lowest) mortgage rates. However, as we all know, we don’t live in a simple world.

In 2008 Congress passed the “Housing and Economic Recovery  Act of 2008” (HERA). HERA permanently increased the conforming loan limits to the lesser of:

• 115% of area median home price (which varies by county) or
• 150% of conforming loan limit ($625,500). If that amount is less than $417,000, $417,000 remains the conforming limit

Confused? Don’t worry. It’s gets better.

Due to all the volatility in the market, a few months after Congress passed HERA, they passed the “Economic Stimulus Acts of 2008” (ESA). ESA temporarily increased the conforming limit once again to the lesser of:

• 125% of area median home price (which varies by county) or
• 175% of conforming loan limit ($729,750). Again, if that amount is less than $417,000, $417,000 remains the conforming limit

This “temporary” limit has been extended several times. The most recent extension expires on 9/30/2011.

That’s all fine and well, but what does it mean to the average borrower?

For many borrows, it probably means nothing at all, in fact the majority of the country falls into the standard conforming limit and they won’t be affected at all. The Detroit area, where I live, isn’t affected. Our limit is $417,000 and has been through all of this.

But, for roughly 250 counties in the US (out of just over 3200) the amount folks can borrower will go down. If you live in an area where the cost of living is high, you are probably impacted. Places like California, Washington DE, New York City, New Jersey will feel the effect.

Many of these areas will drop from a maximum of $729,750 to $625,500, but that’s just the headline numbers. Any counties where the limit today is over $417,000 will probably be lowered down. The same goes for FHA loans – if you are considering an FHA loan, the limits will drop even further.

Here’s the final note. The “temporary” limits that are set to expire could still be extended again by Congress. Many people expect them to do so. But if Congress does not act to extended the temporary limits, any loan with the higher loan limit will need to close by 9/30/11.

Any questions? I’m happy to answer them.

Bobbi McPherson is an FHA Product Manager for the Quicken Loans Capital Markets Team. An avid scrapbooker and mother of two, McPherson has been with Quicken Loans since 2000.

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