Financing in Pleasanton>Question Details

Raj, Home Buyer in Fremont, CA

FHA loan limit for California

Asked by Raj, Fremont, CA Sat May 23, 2009

My understanding was that the FHA conforming loan limit for 2009 was $625K for high cost areas like CA.
The Bank Of America online mortgage calculator gives a lower mortgage rate for loans upto $417K.
Anything above that has a higher interest rate.

I was wondering if the $625K limit is not a rule and if one has to shop around for it.

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BEST ANSWER
Hi Raj, here's why you are seeing a pricing disparity between loans up to 417K and above:

First, right now, there are functionally only two conforming "conventional" loan amounts:

1) “Classic” Conforming Conventional to $417K
2) High Balance/Jumbo Conforming Conventional to a max of $729,750 (subject to state/county)

You can check these different levels here (enter state/county):
https://entp.hud.gov/idapp/html/hicostlook.cfm

Even though the government has redefined "conforming" (a few times now), that's not to say the higher “conforming” level has been welcomed with open arms by lenders, primarily because Mortgage Backed Securities investors are not particularly fond of them (if investors are not fond of them, lenders are not either). There are a number of reasons why the interest rate spread between the "classical conforming" and "jumbo conforming" rates will continue:

1) The government is only guaranteeing the base 417K conforming loan limit, so investors of mortgage-backed securities (MBS) are focusing their dollars there (by the way, it’s a myth that the government did this before). As a shell-shocked" investor worried about financial stability you are going to stick with a guaranteed investment - especially with the economy in its current state and unemployment on the rise (simply put, unemployed people stop making mortgage payments).

2) The FED is now the primary purchaser of classic conforming MBS, specifically 4.0% & 4.5% MBS Coupon bonds, which typically encompass 4.25-5.125% mortgages. This helps to keep the interest rates artificially low for classic conforming loans.

3) With weak demand by investors for "non-guaranteed" Jumbo MBS, their interest rates are higher; however, it’s for a reason NOT primarily tied to risk! Jumbo loans are priced primarily on the cost of securitization being spread over a smaller number of jumbo loans as compared to conforming loans. This increases the securitization cost per jumbo loan, and this elevated cost gets interjected into jumbo pricing on lender rate sheets to cover this cost.

Case in point: which loan is more risky?
1) $200,000 loan, 20% down, self-employed seasonal contractor, 620 credit score, or
2) $725,000 loan, 20% down, 15-year salaried Google Engineer, 805 credit score.
Isn’t the classic conforming loan more risky?

For these three reasons (FED guarantee on classic conforming, FED’s purchasing focus, securitization cost spread for jumbos) classic conforming loans have lower interest rates.

Will "conforming jumbo" pricing improve significantly in 2009? They should. As covered here:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/23/…
Fannie Mae and Freddie Mac recently issued loan underwriting criteria indicating that they would start buying loans of up to $729,750 from lenders starting May 4th. Remember, the key to lower rates for jumbos is securitization cost. So, this move should lower jumbo rates; however, it will have to be seen to what degree this in fact will narrow the interest rate gap between the conforming and jumbo-sized loans. Historically, and until July 2007, the spread or difference between conforming mortgage rates and jumbo rates moved within a narrow range of about 0.20%. As of 5/22/09, this was at 1.31%. This will be the "index" to watch to see if the new purchasing has a positive effect. Stay tuned...

To understand the market mechanics that determine mortgage rates see:
http://docs.Steven-Anthony.com/SAR-HowMortgageRatesAreDeterm…
(Note that all the current government interaction definitely is influencing these mechanics)

Please see the following paper on how to properly "rate shop", and be aware that "best price" very rarely gets you best advice.
http://docs.Steven-Anthony.com/RateShopping-DoItRight.pdf

Also, I do not know your personal situation; however, consider the message contained in this paper:
http://docs.Steven-Anthony.com/HowToSafelyManageHomeEquity.pdf
Some of its points may influence you refinancing decisions.

Best, Steve
0 votes Thank Flag Link Mon May 25, 2009
I would just keep in the mind that currently the rates are different for each of the following. (This is a generic statement)

1) Less that 417,000
2) Between 417,000 to 729,750
3) Above 729,750
1 vote Thank Flag Link Sun May 24, 2009
Recently loan limits got raised to $729,750 depending on county. Anything above the "Normal" $417k loan limit is subject to higher pricing. Pricing dos vary between lenders. I have successfully priced better than BofA on many occasions. I would be happy to talk with you.

Best,

Brian
1 vote Thank Flag Link Sat May 23, 2009
New FHA guidlines have raised the limit to $729,750 - but these are specific to "high-cost" areas - which is a lot of California, including Fremont. In fact, i just closed one last week, so I know the limit is accurate. Rates below $417k are the lowest as FHA "Jumbo" loans carry a higher risk and are priced accordingly. Hope this helps my friend. Best regards, John
0 votes Thank Flag Link Sun May 24, 2009
I guess I got confused between FHA and conventional conforming loans.
My question was about conventional loan limits.
0 votes Thank Flag Link Sat May 23, 2009
Raj in Alameda and Contra Costa the limit is $729,750.

I recommend FHA only if you are short of Down Payment and if your credit is not so good!!
Web Reference: http://www.bestcaloans.com
0 votes Thank Flag Link Sat May 23, 2009
FHA loan limits are complicated. Here is a great link that help you find the information for the area you live in, and other factors that affect the loan amount. Good luck! https://entp.hud.gov/idapp/html/hicost1.cfm
0 votes Thank Flag Link Sat May 23, 2009
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