The new conforming loan law known as HR 5140, the Economic Stimulus Act of 2008 was signed by President Bush just before Valentine’s Day. The new law will temporarily raise the amount of Conforming Loans to 125% of the average home price for any particular area. This is exciting news for any home buyers or owners. Conforming loans have a lower interest rate and are easier to qualify for than their big brother the jumbo loan.
At this point in time there are a lot of questions as to when this loan will become available to us. Although President Bush has already signed the bill, there are steps that the government must take before people will be able to acquire this type of loan. At the time of this article, the Federal Government is still working on determining what the average home prices are in the various communities in the United States of America. Once this report has been completed, the conforming loan increase should be available to home buyers shortly thereafter. Our latest estimate is that the new loan size should be available some time in April 2008.
So what does a bigger conforming loan mean to you, the buyer? First and foremost, you’ll be able to qualify more easily for a home loan and get a better interest rate while you are at it. Suddenly a home that is higher in price and previously unobtainable may now fall into your range of affordability. Historically, a fixed rate conforming loan has been about 1% less than a jumbo loan of similar 30 year term. However, there are other factors that may be working against you at the same time. Some individuals feel that conforming loans will actually have a higher interest rate due to the simple fact that they will be for higher values than they were before. Yet at the same time, the federal government has been dropping interest rates. So it is many peoples’ hope that we will see the conforming loan’s interest rates drop further with time despite being for a larger dollar size than before.
Another issue to consider is though a 1% interest rate drop on your loan can save you a couple hundred dollars per month depending on the size of the loan, home sellers will know this. More importantly, the market will know this. The other buyers who you are competing with will be hoping to stretch their limits a little farther. That means more competition for you. The market will support housing prices at a higher level. What we could see is a situation where conforming loans could bring down the interest rate, yet home prices may either plateau or rise due to the relief of pressure on buyers who can suddenly afford a larger loan size that yields the same monthly payment. Be careful on the math in your when deciding to buy since it may be reasonable to simply look at rental homes instead.
So what should you do? Obviously, a conforming loan would be a better loan than a jumbo loan. So if the timing works out to your favor and you are looking to buy in a couple months, take advantage of the new law. But if you are biding your time waiting for the conforming loan to become available, you may not want to wait.
First we don’t know when the new loan sizes will become available. I polled a couple major lenders but they were unable to provide me a start date for the new conforming loan. The best estimate they could offer was mid April. But that was not a guaranteed time line either. So for the short term, we have a lot of potential buyers waiting in the wings in hopes that they can get a better loan on their new home. This will result in a decrease in demand while buyers hold off on making offers for the next few weeks. Once the law takes effect all those buyers will come out of the woodwork which will place a temporary increase in demand on homes. So if you are simply waiting for the loan to become available for a specific house you may be better off making an offer on the house now rather than waiting until later. You can always refinance your home sometime in the future providing there aren’t restrictions on the loan you obtain such as a prepayment penalty. If the rates drop enough in the future, you may be able to refinance with negligible cost. So if you found the house you want, it may be time to make an offer and start living in your new home!
