As prices soar, so does amount you can borrowForget jumbo loans: The conventional limit rises to $417,000 next year, matching the 16 percent increase in home values across the country.
Jim DebothSpecial to the Sentinel
December 18, 2005 Orlando SentinelThe 2006 conventional loan limit, which is the most mortgage money you can borrow without having to get a higher-cost jumbo loan, will take a giant hike to $417,000 -- up 15.9 percent from this year.
This is the largest single increase in the ceiling since the Office of Federal Housing Enterprise Oversight, the federal agency that keeps track of home prices, established an annual limit in 1980.
Whether the increase will affect your plans or finances depends on the sort of home you want to buy and where it is.
Sometimes referred to as a conforming loan, a conventional loan is the sort that most of us get when we buy a house. It also is the type of loan that most lenders link to their "best" interest rate. A lender advertising a 6 percent interest rate, for example, is normally referring to a standard 30-year, fixed-rate mortgage.
The 2005 conventional loan limit on a single-family home was $359,650, and anyone borrowing more than that would have to pay an extra quarter point or more in interest for a jumbo loan. As of Jan. 1, however, home buyers can borrow up to $417,000 without triggering the higher rates charged for jumbo loan amounts.
Though the new limits are important to the mortgage industry, the only buyers who benefit are those shopping at the upper end of the limits spectrum. Fannie Mae and Freddie Mac, the two biggest mortgage buyers in the country, estimate that this will help roughly 500,000 families in high-priced areas and hot real estate markets such as New York City, Los Angeles, Chicago and Seattle.
In some areas, a $417,000 mortgage, coupled with a good down payment, can get you a starter house or a fixer upper without a jumbo mortgage rate.
"The 2006 limit is based on the average price of homes across the nation," says Frank Nothaft, vice president and chief economist for Freddie Mac, "and is consistent with house-price appreciation.''
A National Association of Realtors study found the median price for an existing home rose 16 percent from October 2004 to October 2005. So the loan limit increase reflects that rise in the median, or middle, and the average price of houses nationwide.
"So, just as house prices grow year after year, so do the loan limits. We've had five years of very strong house prices," and the annual price increases show that. "It certainly helps make mortgages and home ownership that much more affordable."
The 15.9 percent increase applies to multifamily units, too. The new limit for a duplex is $533,850. It's $645,300 for a triplex and $801,950 for a four-plex. The new limit also affects second mortgages, putting the new limit at $208,500.
The limits are 50 percent higher in Alaska, Hawaii, the Virgin Islands and Guam, which are designated "high-cost areas." This means that if your credit and income are good enough, you can get a $1.2 million mortgage for a four-plex in Hawaii, for instance, and have it treated as a "conventional" loan.
Nothaft says that the difference between a conventional and a jumbo loan can be half a percent in a 30-year conventional loan, or even more depending upon your credit, the size of your down payment and the type of loan you get. At $417,000, even a half-percentage point can make a major difference.
If your credit is less than perfect, or if you don't have a big enough down payment, you could wind up with a nonconforming loan and have to pay more in interest because these types of loans are considered riskier. Typically, the riskier the loan is for the lender, the more expensive it is for the borrower.
