As announced previously, FHA and Conventional loan limits will be decreasing as of October 1.  Those changes were interpreted by the mortgage origination market as meaning that loans must FUND prior to the effective date (Oct 1) in order to be “sellable” to the mortgage backed securities market.  Since loan processing can take 30 to 45 days depending on the lender, most (if not all) lenders have stopped accepting applications for any loans that exceed the Oct 1 limits.

In other words, FHA and conventional loan limit decreases have already been implemented.

Originated or funded?

Many published reports reference this loan limit impacting loans “originated” after October 1.  The issue here is that the policy is being used by the investors (fannie mae, freddie mac, and FHA) but the rules are being implemented by the mortgage originators who are concerned about their ability to resell the mortgage debt into mortgage backed securities on the secondary market.  They are concerned that at a later date an investor may try to have the originating bank repurchase a bad loan because it was not “originated” by the Oct 1 deadline if they were to use the term origination as the date the loan funded.  It is up to interpretation what the term “origination” means, so lenders are taking the most conservative approach and defining it as the date the loan funds and begins to accrue interest

Are FHA and Conventional loan limits going to remain equal to one another?

The short answer… NO

The HERA (Housing and Economic Recovery Act) legislation standardized the calculation of loan limits and also provided for no decreases in the lending limit per county (based on the pre HERA limit), but the FLOOR (minimum loan limit) calculation is different.  Conventional loans have a floor of $417,000 which means that no matter what your median home price is, your loan limit is at least $417,000.  FHA has a floor of 65% of the conventional lending limit, so that means that FHA loans limits can be as low as $271,050.

Resources

How to determine Conventional loan limits

How to determine FHA loan limits

This press release from HUD outlines the counties that have a decrease in FHA loan limit.

You can also go to HUD’s website to view loan limits by clicking here and make sure to choose the correct period (limit year).

Be aware that most if not all lenders have already stopped taking applications for loans with a limit in excess of the Oct 1 limits.  See this article for more details.

Click here for information on how to determine Conventional lending limits

The FHFA determines the loan limits for conventional loans that are secured using Fannie Mae and Freddie Mac.  This list is updated each year around mid November with the loan limits for the coming year.

Temporary loan limits have been in place and are expiring on Oct 1, 2011.  This will change the calculation of the maximum loan amount to 110% of the median home price with a minimum of $417,000.

Use the resources below (provided by Fannie Mae’s website) to determine the loan limits for your situation.  The “perm” limit is the limit in effect for loans originated after Oct 1 (see this article for details on why those limits are actually in effect already).

Resources

Loan Limits by Area

Listings of loan limits by area, as determined by FHFA, are provided below. The spreadsheet provides drop-down menus to allow sorting and viewing by county, state, or MSA.
View the list of loan limits
(.xls, 693K)

Loan Limit Geocoder

Use the Loan Limit Geocoder™ to find loan limit information for specific addresses – enter a single address or a batch file.
Access the Loan Limit Geocoder

How to determine FHA loan limits

Click here for an article on the changes to FHA loan limits

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Description

Responsible person

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• ·         If your renovation project involves structural issues, or over $35,000, then we need to order a HUD consultant to visit the property and review the scope of the project (this will cost buyer around $500)

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• ·         Review your documentation and request from buyer any missing items
• ·         Contact Contractor and have them complete our validation forms
• ·         Gather documents from related parties (title company, realtors, etc)

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Click here for a printer friendly version of this list.

What is happening in the market today, and how does it impact mortgages?

• On Friday S&P downgraded US Government debt

• Treasuries have typically been considered the most stable investment
• The downgrade means that treasuries are not as secure as some may think.

• Mortgage bonds typically follow same trends as treasuries, which is usually the opposite directions of the stock market

• Short term = volatility in the market (large rate swings)

• Long term = there are many variables that will impact the market such as
  • Changes to fannie mae and freddie mac
  • ability of the federal government to get spending in line with revenue
  • continued financial regulation changes that will impact mortgage financing.

• Bottom line…
  • Home prices are at all time lows
  • Interest rates are at all time lows
  • Perfect storm of opportunity to purchase a home

• Questions?
  • call us at 209-910-4019
  • e-mail at john@johnloanking.com

Loan limits will be dropping as of October 1 2011

Update as of Sept 7th

Change #2…Under 90 day seasoned flips scheduled to go away on December 31

If you need help interpreting these rules and how they apply to you, please contact us to schedule a free consultation so that we can review your needs and help you navigate the ever changing waters of the home financing market.

To learn more about these GREAT HOMEOWNERSHIP OPPORTUNITIES, click here.

Even if you are not utilizing these funds, many first time buyers find it helpful to go thru these educational courses.  You just need to realize that these courses are set up to be very conservative in their outlook on homeownership.  Therefore there may be situations where they tell you that you only qualify up to a certain amount even if your lender (ME) says otherwise.  Realize that they have their own guidelines, but those guidelines do not always match what the actual loan requirements are.

For information on getting homebuyer education, click the links below.

1. NeighborWorks offers an online homebuyer course.  The class is offered in English and Spanish.  The cost is currently $50 (check the site to be sure this has not changed) and does require a one on one meeting with a counselor before you can get your certificate.  Visit them at www.ehomeamerica.org, or call them at 209-473-4363 as they also offer in person classes.
2. Visionary Home Builders of California offers face to face counseling at their Stockton office.  visit them online at www.visionaryhomebuilders.org/calendar for the schedule of their classes, and you can register at www.visionaryhomebuilders.org/homebuyer-education/education/.  Currently their classes cost $35 but check the website to be sure. They also offer classes in English and Spanish. You can reach them by phone at 209-952-8806
3. NID-HCA also offers classes.  I have not found a website for them, so I do not have information on costs or frequency of classes, but feel free to call them at 209-952-8806 or reach out to them via e-mail at housingcounseling@msn.com .

If you have any questions about the process of getting homebuyer counseling, please call me at 209-910-4019 or e-mail me at john@johnloanking.com

Long-term view

If you can do many if not all of the following things with your refinance, then in my mind it is a no brainer.

• lower your interest rate by at least 1% over your current rate
• Decrease the time that it takes to pay off your loan (and therefore the total amount of repayment should be reduced)
• recover your upfront costs within the first 3 – 4 years when dividing the costs by the amount saved each month.  (for example if the loan costs you $3000 to refinance and it saves you $150 per month, then you are recouping your costs within the first 20 months… $3000 / $150 = 20)

The challenge here is that often to accomplish all of these goals, you are looking at increasing your monthly payment (or at least not realizing significant payment savings).  Most people refinance into a new 30 year loan.  That is great to help you with your monthly payment (short term view) but sometimes it means you are paying thousands more in interest over the life of the loan since you are starting over with another 30 years (although people rarely keep their loan for 30 years, but that is a topic for another time).

Short Term View

The most common reasons for people to refinance is to either lower their monthly payment on the home today, or pull cash out either to consolidate debts or use for other expenses.  Although these are all good reasons to refinance your mortgage, they often leave you with significantly more debt in the long run.  This is where you need to decide what is most important, and understand that sometimes making a financial decision that is good short-term and bad long-term is necessary… I just want to make sure you understand the full scope of the decision, and make sure that you do not make a habit of these types of decisions as people often end up in far worse situations as a result. Lets take a few minutes to break down the things you should think about when making a purely short-term decision.

Refinancing to lower your monthly payment

First of all, if you are having a hard time making ends meet, then by all means you need to refinance (if you qualify).  The alternative would be to possibly lose your home or have to default on other debt… which are both bad long-term financial decisions, so regardless of the increase in total payments over the life of the loan, keeping your home and your good credit far outweighs the costs.

Beyond that, refinancing just to have more monthly disposable income is often a bad idea.  Many people think that if rates are lower, then it is a good idea to refinance to get a lower payment.  That is only true if the total of your new payments is lower than the total of your remaining payments.  If you are at 6% interest with 20 years left and you refinance into a new 30 year loan at 4.75% you will pay significantly more over the life of the loan.  In this case I would suggest that you consider a new 20 year loan since that will both lower your payment and rate, and also lower the total of your payments since your term will remain the same.  The challenge is when you have a really short time left on your loan (like less than 10 years).  Lowering your interest rate will not save you much on your payment since more of your payment goes to principal.  Therefore it is often hard to determine what is the best option, and I strongly suggest you sit down with a trusted mortgage advisor to talk about your loan and your goals to determine if it makes sense.  Just remember that your lender does not get paid unless you do a loan, so be careful who you choose to get advice from since their interests are not usually the same as yours if the numbers say that you are better off staying in your current loan.

Refinancing to pay off debt or pull cash out

This is the category that has gotten people in the most trouble over the last 10 years.  Truth is that banks have gotten more stringent in granting these types of loans, and fewer people have the equity to qualify for them (and if they do, it is usually because you did not refinance during the last decade when everyone else treated their home like an ATM machine).  If you are fortunate enough to have equity in your home, be very careful when you are considering tapping into it.  When you increase the balance on your mortgage, even though the equity belongs to you, the money you borrowed belongs to the bank, and they want it back.  Therefore, no matter how you look at it, you are going to end up paying more for your home in the long run. (yes, I know, if you lower your rate enough you can actually pull cash out of your house and still have a lower payment without increasing your term… but even in this case you must consider what if you had done a refinance without pulling cash out, your payment or term would have been even lower… so the higher balance that results from taking cash out is still costing you more than keeping your home balance where it is today).

I guess my #1 question for you is WHAT IS THE MONEY FOR, AND HOW BAD DO YOU NEED IT?  Is there any other way to get the funds for this endeavor?  If so, then you need to compare the cost of the lower rate on home loans (as they are currently some of the cheapest sources of funds out there), compared with the risk of losing your home if things do not go as you planned.  I certainly do lots of cash out refinances, so don’t feel bad if you decide this is the best option for you… but just go into it eyes wide open.  Your house cannot be treated like an ATM machine, and if you end up pulling cash out to consolidate debt, do you have a plan to make sure you do not run up that debt again?  So many people get themselves in trouble by increasing their mortgage payment since it is so much lower of a payment than the credit cards… only to have the credit cards back up within a year or 2.  Sometimes the pain of paying back your credit cards is a worthwhile lesson that will keep you from digging that hole again, and will allow you to keep your home if things got really bad and you felt that bankruptcy was the only option.

Find someone you trust!

When deciding if you should refinance your home, you need help in running the numbers and getting advice on what to do.  Personally, I pride myself in giving objective advice that has nothing to do with how I am compensated.  Truth is that I have gotten more referrals from people who I advised AGAINST doing a loan.  Why?  Because they tell everyone they know about the experience and it provides a sense of confidence in everyone else that if I say they SHOULD do the refinance that it is because it makes financial sense for them, not only for me!  BUT, if you have not worked with me in the past, or are not referred to  me by someone who has worked with me, then this is only lip service (and by all means I do subscribe to the adage “never trust someone who says trust me”… so I will not say that!)  So how do you choose someone to trust?  Get a referral.  Just be careful because even though someone did a good job for your friend, it does not mean they only had the borrowers best interest in mind.  Instead, I suggest going to someone in the industry (like a realtor or a title company) and getting a referral from them.  The difference is that people in the industry work with lenders on a daily basis and have experience multiple transactions with that lender (instead of just the one transaction that your co-worker did).  The second reason this is a good idea is that now the lender is actually serving 2 clients… you and also the person that referred you.  We all know how important referrals are (as a matter of fact my business plan is built around working “by referral only”) and when a lender has a regular referral relationship on the line, they are going to make sure to keep that partner happy.  That’s because if they do not serve you well, that realtor will think twice before sending their next client referral over to that lender.  I wish everyone was honest and ethical, but they are not.  And there is no “red badge of honesty” to check for… so you need to find other ways of making sure you are working with the right professional.

Good luck ,and let me know if there is anything I can do to help you with your decision-making!