Coastal California down payments decrease by $8,520 on select homes in 2017
The conforming loan limit is set to rise by 10,650 in Coastal California, reducing down payment requirements by $8,520 on homes prices above this limit.
During the housing bubble, the conforming limit rose as high as $417,000, but when the housing bubble burst, this limit was raised to $729,750 in markets like Coastal California that needed the most government support to maintain peak prices. In 2011, the conforming limit was lowered from $729,750 to $625,000 ($546,250 in San Diego).
The hard cap on FHA and GSE loans forces many borrowers to use a jumbo loan. Lenders who originate jumbo loans have stricter standards than the FHA or the GSEs, and most importantly, they require 20% down. Most potential buyers lack sufficient down payments.
Many potential homebuyers earn enough to qualify for loans much larger than the conforming limit; however, most don’t get these loans because they fail to meet the down payment requirements.
This problem is illustrated below. In Orange County, the conforming loan limit on GSE loans and the FHA loan limit is set at $625,500. For purposes of this illustration, I used the 3.5% down required on FHA loans because the 3% down program at the GSEs isn’t widely used.
An FHA borrower in Orange County can buy a home for $647,392.50 and use exactly 3.5% down, or $21,892.50, a tiny sum given the purchase price. However, every dollar of the next $134,482.50 must come out of the buyer’s savings. In order to borrow $625,501, the borrower must use a jumbo loan, and that generally means 20% down, which translates to a $781,875 purchase price.
Needless to say, many more people have $21,892.50 than have $156,375, the down payment at a $781,875 purchase price. This makes the market for properties priced above the conforming limit very thin and mostly unavailable to first-time homebuyers.
Not to worry. The government is here to help. ~~ giggles to self ~~
By Aaron Terrazas on 11/23/2016
A broader pool of U.S. mortgage borrowers will be able to access the more flexible terms of government-backed loans next year after the Federal Housing Finance Agency (FHFA) upped the national conforming loan limits for the first time in a decade, effective in 2017. …
For most counties (2,912 of 3,146 counties nationwide), the conforming loan limit increased from $417,000 to $424,100, the first nationwide increase of the baseline, default conforming loan limit since 2006 (when it increased to its current level from $359,650). The conforming loan limit is higher in certain counties identified as “high cost” counties.
The reason many of these counties are “high cost” is because the higher loan limit enables borrowers to obtain larger loans and thereby bid up the price.
In the highest-cost counties in the contiguous 48 states – including those in and around Boston, New York City, San Francisco, Los Angeles and Washington, D.C. – the conforming loan limit will increase from $625,500 to $636,150 (figure 1). Conforming loan limits are also higher in Alaska and Hawaii.
Historically, large coastal metros have accounted for the bulk of homes requiring jumbo loans. California, for example, is home to about 9 percent of the country’s housing stock, but 32 percent of the country’s homes that require a jumbo mortgage.
The impact of raising the conforming loan limit tapers off quickly. Once a borrower utilizes a jumbo loan, they needed a 20% down payment anyway. This threshold was moved up by $10,650, but once past this point, there is no positive impact to borrowers at all. Somewhere between 25% and 50% of transactions will not be affected.
More recent Zillow data suggest that, given current conforming loan limits and home values, 53 percent of San Francisco homes, 26.2 percent of Los Angeles homes, 22.1 percent of San Diego homes and 17.6 percent of Seattle homes would require a jumbo loan – highest among the largest 25 U.S. metros.
How will this impact the housing market?
The down payment barrier described above will still exist, but the barrier will be moved $10,650 higher. In Coastal California counties with the new $636,150 conforming loan limit, all houses priced between $647,392 and $781,875 will now require a lower down payment — lower by $8,520. While this sounds like a boon to buyers, the impact will be small.
The higher limit enables borrowers to bid $10,650 higher than they could in 2016; however, since these borrowers bid on $650,000 properties, a paltry $10,650 represents only a 2% of the purchase price. The higher limit will help a few buyer on the margins, but the market will quickly adjust.
This spring when sellers return with asking prices 10% or more above last year’s comparables, the minuscule increase in the size of the borrower pool helped by the lower down payment will quickly be lost by the impact of higher prices and potentially higher mortgage rates.