The drop of conforming loan limit of $729,500 is coming. This is the type of change that everybody will be impacted.

Currently, whether you buy a house or refinance in Silicon Valley, as long as your loan amount is no more than 729,500, it is treated by lender as conforming loan and it’s backed by the government sponsored enterprise Fannie Mae and Freddie Mac.

This is going to change after Sept 30. Why you have to be concerned and what does that mean to the housing price and mortgage rate and even the rental market?

For buyers:

First, your borrowing cost will go higher. The reason the conforming loan rates are lower than jumbo loan is because the lenders bear much less risks for conforming loan since they are backed by Fannie Mae and Freddie Mac. With this limit dropping to lower level ( in most areas in Silicon Valley, it will be around 625,000),  more loans will be falling into jumbo loan category. 30 year fixed rate for jumbo loan is about 1% or more than the conforming loan. This will add almost 500 dollars more monthly payment for a loan amount of 729,500.

Second, it will mean more down payment for buyers.  With as little as 15% down payment, you can get loan amount of up to 729,500 when it’s in conforming category now. Once it’s in jumbo category, most lenders require at least 30% down payment. 

For home owners:

The main impact on home owners is the uncertainty of how this is going to impact the housing price, especially in the upscale neighborhood.

A 3-4 bedroom single family house in neighborhood with good schools such as Cupertino, Palo Alto, West San Jose, Missioan San Jose in Fremont, Los Altos, Mountain View, Sunnyvale can easily go above one million and the demand is strong now for those priced under 1.2 million.

This new change is likely to make some buyers change their buying criteria or timing in this segment. Or they may consider other areas with good school but more friendly pricing such as Evergreen. However, to what extent this will impact the pricing, it’s hard to predict.

Like any market, uncertainty is what most people do not like. Timing the market is hard. Buying a house or selling a house is a big decision and should be part of your long-term life planning. With change like this, it’s even more import to plan for longer time rather than try to timing the market.

For the backgroud info of this 729,500 loan limit, check: http://www.siliconvalleyhousingpost.com/mortgage/2010/09/30/high-balance-conforming-loan-limit-of-729500-extended-for-one-more-year/

If you want help to analyze your personal case of buying or selling a house, please contact me for an in-person consultation.