In the alphabet soup world of the mortgage business, some of the major sources of mortgage programs come by way of the Government Sponsored Enterprises (GSE) known as Freddie Mac (FHLMC) and Fannie Mae (FNMA) for conventional loans, and the Federal Housing Administration (FHA) for government insured loans.

In the past several years, the role of FHLMC and FNMA have changed from being private enterprises with government backing to becoming government agencies. With all of the taxpayer losses that have developed by the government needing to step in to keep things from becoming complete chaos, Congress is trying to define the role of FHLMC, FNMA and FHA going forward.

After the mortgage meltdown began, and the quality of themortgages were less than what the investors thought they were buying into, the availability of new mortgage money was vastly reduced. Private investors (like pension funds and Wall Street bond traders who bundled mortgage-backed securities) pulled out of the market especially in the jumbo loans above $417,000.

At that time, Congress allowed for FHLMC and FNMA to begin purchasing loans above $417,000 – a category that became known as high-balance conforming loans. The limit that they allowed was as high as $729,750 for homes in certain areas.

And, although this was originally planned as a temporary measure, Congress extended it a couple of times to try to allow for a housing recovery in the economy. Effective October 1, 2011, in an effort to reduce the taxpayers exposure, the limits were reduced to $625,500 in some areas.  In San Diego, the new limit is now $546,250.

So, with conventional financing we have conforming loans that still go to $417,000, high-balance conforming loans that go to $546,250 in San Diego, and above that figure is the jumbo loan category. There has been some re-entry of private money back into the jumbo loans, but it still is not as robust as it was before the mortgage meltdown, and the interest rates are higher for those jumbo loans as well.

Where the government inherited the loans that were created for FHLMC and FNMA and assumed the risks and liabilities in those loans, they have always had the control and management of the FHA insured loan program.

FHA differs from conventional financing because it collects borrower-paid mortgage insurance to create a fund to cover potential losses from bad loans. Everyone who obtains an FHA loan is required to pay mortgage insurance.  They amount that they pay and for what period of time differs based on the loan amount and the loan-to-value ratio of the loan.

Currently FHA requires a up-front mortgage insurance premium of 1% of the loan amount that can be financed, along with mortgage insurance based on a 1.15% of the loan amount annual premium, that is paid monthly with the regular payment.

One of the advantages of considering FHA include a much lower down payment of as little as 3.5% of the purchase price (as opposed to 5% to 20% on a conventional loan).

Another advantage is that there is no longer the level playing field between FHLMC/FNMA and FHA  regarding loan limits as there was in the past.

In some areas, FHA will still allow loans as high as $729,750, so if you need a higher loan amount or if you are not able to place a large enough down payment on the home to satisfy the conventional loan programs, FHA will be a viable option.

If you were to get an FHA loan of $600,000, you could finance the up-front mortgage insurance premium making your final loan amount $606,000.  Your monthly mortgage insurance would be$580.75.  You can see that there is a cost/benefit analysis that you need to assess for yourself.

If you are able to buy the home that you want, with a down payment as low as 3.5%, and youcan qualify for the monthly payments including the mortgage insurance, it may very well be worth the cost of the mortgage insurance to make that dream a reality for you.  This could be especially true if you were able to get a great deal on the price of the home.

We are waiting for all of these new changes to work their way through the system.  Once Congress passes the enabling legislation and the agencies produce their regulations, we then have to see which of our lenders and investors will offer the new programs and if they impose any additional limits to what may be allowable by the regulations.

My advice would be that when you are ready to shop for a new home or a new loan, just give me a call and we can explore all the options that I have available at the time. We can then strategize as to which program may suit your needs the best.