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Affordable Mortgages and Lower Downpayments Are At Risk

This October Federal Housing Finance Agency is forced to reduce conforming loan limits on mortgages guaranteed by Fannie Mae and Freddie Mac. Supporters expect that the demand driven by buyers hoping to beat the deadline this summer will drive up home prices and this will ease recent dips in home values. Many analysts, however, speculate that the rush will have less of an effect than thought and likely will not last.

Lamacchia Realty believes that this will have a terrible impact on home prices over $500,000. Reducing conforming loan limits essentially means that buyers will have to come up with larger down payments for more expensive homes; or, they will have to buy less expensive homes. This will undoubtedly pull homes prices down. Before 2003, in the more costly markets, all mortgages that exceeded $417,000 were considered to be jumbo loans. But in 2008, one of the many attempts to stimulate the economy was Congress raising limits across the country. Raising loan limits offered an opportunity for more people to purchase homes with smaller down payments and lower interest rates because they were not jumbo loans. On October 1, 2011, it is all about to change.

This October, it is expected that loan limits across the country will be reduced.  In Eastern Massachusetts, the loan limit will be reduced from $529,000 to $465,000, which means that a purchase of a $575,000 will be harder to come by for buyers who do not make a down payment of at least 20%.

In other areas of the country where the cost of living is higher, the new rules mean that a $1 million home, for example, will require a home buyer to increase their down payment from $270,000 now to $370,000 after October 1 because the limit is going from $729,000 down to $625,000. This will drastically change the landscape of the high end real estate market and without a doubt bring prices down.

According to the National Association of Home Builder estimates, these new mortgage loan limits could impact roughly 1.38 million homes in 204 counties nationwide. If these homes were to be put up for sale, they would require financing with higher mortgage interest rates. NAHB’s recently issued report show how this change, based on criteria established by Congress in 2008, would affect the mortgage market. In their report the NAHB notes that not only will millions of homes fall outside of the loan limits, but the number of ineligible homes for FHA-insured mortgages will increase to 12.2 million.

With so many homes likely to fall outside of the conforming loan limits, many are concerned that the qualification of higher down payments and tighter credit requirements, will ultimately impact demand and prices for such homes.

It is difficult to predict the long term impact of lowering loan limits and although this could provide a very temporary boost in home sales before October 1, will this ultimately price many potential buyers out of the housing market? Lamacchia Realty believes that. We also believe that this is a terrible time to reduce these limits. Real estate has enough negative things working against it. But not everyone does. Time will tell, but in the meantime it is wise to follow updates as to the progress of the proposed reform in order to make sound decisions regarding homeownership and refinancing.