Source: The LA Times
Borrowers are already expected to face a challenging lending environment in 2014, and potentially adding to the challenges is a reduction in loan maximums next spring. Simply put, Fannie Mae and Freddie Mac are considering reducing the maximum size of home loans that they can acquire. Critics argue that if borrowers aren’t already concerned about the maximum loan amount being cut next year, they should be because under the revised limits, they may have to pursue a jumbo mortgage. By pushing eligible loan amounts downward, many buyers could find themselves unexpectedly in the jumbo arena.
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In the jumbo area, the bar is far higher for minimum credit scores and financial reserve requirements. In addition, down payments typically must be much larger.
Critics also suggest such borrowers may also have to settle for an adjustable-rate mortgage rather than a fixed-rate mortgage, or they may need a higher-rate “piggyback” second mortgage.
A potential reduction in loan maximums stems from desires to lessen federal involvement in the mortgage market. Edward J. DeMarco, acting director of the Federal Housing Finance Agency, announced that he was seriously considering the strategy.
Industry analysts suggest the maximum Fannie-Freddie loan size could decrease from the current $417,000 to $400,000 in most parts of the country. For high-cost areas, such as coastal California, there could be a reduction from $625,500 to $600,000.
These decreased limits could take effect as early as May, which could particularly affect buyers who want to purchase newly built houses, or homes with prices above the average for their areas.
If the loan ceilings are lowered, jumbo mortgages could become a bigger piece of the market. Since they are larger than conventional mortgages, they range from just above $417,000 to seven figures. Jumbos also typically have extra costs and underwriting restrictions.
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