The Mortgage Hot Potato: High Balance Loan Amounts

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Hotpotato If you're a subscriber to my blog, then you are probably already aware that conforming loan limits are going to be reduced in late September and that banks will issue their own deadlines in advance of what Freddie, Fannie, FHA and VA have established.

Fannie Mae's FAQs state they will continue to purchase the "temporary" high balance loans as long as the note date is September 30, 2011 or earlier. Lenders will not allow that much time as being caught with a loan that exceeds what will be the new loan limits is having an unsaleable loan to Fannie or Freddie.  It's now a jumbo/non-conforming.  Banks and lenders have to provide an earlier deadline in order to not get caught with a "hot potato" which will cost them dearly with the difference in pricing and guidelines. 

The difference in interest rate for a 30 year fixed with a jumbo and high balance conforming loan amount is around 0.50 to 0.75% in rate.  This morning, a conforming high balance rate for a 30 year fixed is currently 4.625% (apr 4.735).  If a lender wound up being stuck with a "hot potato" loan that had a delayed closing and/or late delivery, and they had to sell it as a jumbo, in order to buy the rate of 4.625%, it would cost (based on current pricing) around 1.75 – 3.5% of the loan amount to buy down the jumbo rate to the note rate.  For example, if a lender is stuck with a conforming loan on a King County property in the amount of $506,001, we're talking a cost of $8,850 to $17,700 depending on the lender.  If this loan does not meet jumbo/non-conforming guidelines, such as having mid-credit scores below 720, it will cost the lender even more. 

Earlier this week, I received proof of this from one of the lenders we work with:

All loans approved and expected to close under the current loan limits must close, fund, disburse and be delivered in purchasable form no later than Friday, September 30, 2011. THERE WILL BE NO EXCEPTIONS. Please review current pipeline and new applications as there is no guarantee as to Super Conforming limits if the loan disburses after September 30th.

In order to "deliver" a loan to this lender by September 30th, a mortgage company would actually need to "close, fund and disburse" about 10 days earlier to their deadline to avoid being caught with the "hot potato".  If you have a loan amount that is in the gap between current high balance limits (which have actually always been "temporary") and the new loan limits, you need to close your transaction by mid-September to be safe.  In the greater Seattle area, this would consist of loan amounts between $506,001 and $567,500.  Here's a list of the other counties in Washington that will suffer a drop in conforming loan limits.  

By the way, this doesn't just apply to conventional loans, FHA loan limits are dropping effective October 1, 2011 too.  I have not yet received a memo from lenders we work with stating what their cut-offs are.  I expect it will be the same as conventional loans – plan on closing by mid-September or risk not being able to close.

I'll post more information as more banks and lenders issue their deadline. Meanwhile, if you are considering refinancing or buying a home and your loan amount fits into this "gap" between the existing limits, you may want to contact your local mortgage professional now if you want to avoid having a jumbo loan.

As always, I'm happy to help you if your home is located anywhere in Washington, where I am licensed.

UPDATE August 4, 2011: Another bank has issued their conforming high balance deadlines:

All loans using the ARRA loan limits must be locked on or before Thursday, September 15, 2011. These loans must be closed and funded no later than Friday, September 23, 2011.There are no further delivery requirements.

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