U.S. makes large home mortgages harder to get

Starting October 1, 2011, large home mortgages on expensive houses are harder to get – because the U.S. government is trying to gradually play less of a role in the mortgage market.

Currently, government-related entities such as Fannie Mae and Freddie Mac guarantee or purchase the majority of home mortgages in the U.S. Lenders are much more willing to provide mortgages if they know the loan can be backed by these entities.

However, the U.S. doesn’t guarantee all mortgages – it only backs mortgages that meet certain criteria. In particular, there’s a size limit to how large a mortgage it will guarantee. That limit varies based on how expensive the housing market is in a particular area. Early this year, the limit was up to $729,750 in the country’s priciest markets.

But the government is eager to play less of a role in the mortgage arena. And one way to do that is to reduce its backing of the most expensive mortgages. So as of October 1, the government is reducing the maximum size of a mortgage that it will guarantee.

This will make it harder for homebuyers to get a large mortgage, because lenders will be less willing to offer mortgages if they aren’t backed by the government. Borrowers who want a big mortgage may find themselves facing a number of obstacles, including higher interest rates, more stringent income requirements, demands for a higher credit score or a lower debt-to-income ratio, or having to come up with a larger down payment.

The change could force sellers of high-end homes to lower their prices. It could also mean that buyers who can no longer afford the priciest homes will be more interested in buying less-expensive homes.

As for Fannie and Freddie, the maximum mortgage amount that can be guaranteed is reduced as of October 1 in some 250 counties in the U.S. These counties account for 27% of the nation’s homes.

The maximum loan that can be guaranteed will fall from $729,750 to $625,500 in high-priced markets such as New York, San Francisco, Los Angeles and Washington, D.C.

The limit will drop to $546,250 in San Diego, to $506,000 in Seattle, and to $465,750 in Boston.

Elsewhere, the limit will drop to as little as $417,000.

An even more dramatic change will affect FHA loans. The maximum FHA loan will be reduced in about 600 counties that together contain 59% of the country’s homes.

FHA loans in some areas will be limited to no more than $271,050.

According to the Federal Housing Finance Agency, the changes could affect 50,000 mortgages each year.

To see a chart that shows the new Fannie, Freddie and FHA limits in all counties in the U.S., go to: http://goo.gl/RHEvd.

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