Sunday, February 10, 2008

Part I: $729,750 Conforming Loan Limit

The Coming Boomlet?

As part of the Economic Stimulus package, Congress has enacted legislation that will raise the conforming loan limit to $729,750 in high cost states (from current $417,000) for loans originated through December 31, 2008.

Conforming loan rates are currently at multi-year lows -- approximately 5.5% -- as opposed to jumbo loans (above the current conforming loan limit of $417,000), which hover in the 6.5% range.

Buyers or those refinancing in the $450,000 - $850,000 price range in Los Angeles can expect to see a decrease in their projected monthly costs.

For a $600,000 loan, the current monthly payment (prinicipal and interest) is $3,792 -- $385/month more than the projected monthly payment of $3,407 under the new guidelines.

The current monthly cost of a $750,000 home (with 20% downpayment, principal, interest, property tax and insurance) is $4,581, equivalent to the monthly cost of an $820,000 home financed at 5.5%. Under proposed terms, buyers will have a 9.3% increase in purchasing power.

In the local market, where sales volume has been down 25 - 60%, expect activity for homes under $1 million to pick up as buyers capitalize on their increased spending power.

It's unclear when the new funding guidelines will come into effect. Given that the expiration date on the incentive is December 31, 2008, one can anticipate changes in the near term.

What's also unclear is what the new conforming loan limits will be for 2-,3- and 4-unit properties. Currently the limits are set at $533,850, $645,3000 and $801,950, respectively.

The single family home loan limit increase is $312,750 -- or 75%. This would translate into new conforming loan limits of $934,237, $1,129,275 and $1,429,162, respectively, for 2-,3- and 4-unit properties.

With Los Angeles' strong rental demand, these new loan limits could create an excellent buying environment for duplexes, triplexes and four-plexes.

Consult a lender to evaluate affordability under these new guidelines. Buyers should take advantage of reduced interest rates and the slow market to purchase properties under the best terms since 2005.