While the federal tax rebate has generated most of the public’s attention in recent months, consumers should examine another part of the Economic Stimulus Act of 2008 — a temporary increase in so-called conforming loan limits.

Under the stimulus package, Fannie Mae and Freddie Mac will temporarily guarantee home loans up to 125 percent of the median home price in high-cost areas, capping out at $729,750. For homebuyers and homeowners in these areas, the program could help them qualify for a conventional loan carrying a lower interest rate, saving them hundreds of dollars a month.

Housing and Urban Development Secretary Alphonso Jackson said in March that 250,000 people may be eligible to buy or refinance their homes under the stimulus package. HUD estimates that homebuyers in about 75 cities and counties including San Francisco, Los Angeles and New York will qualify for the higher loan limits.

“That should shave a good percentage point off an old jumbo loan,” said Ethan Ewing, president of Bills.com, a personal finance website. “If you live in Southern California or Northern California where the housing market needs a little kick in the pants, this is going to jumpstart homebuyers.”

Eligibility rules stricter

Ewing and other experts warn, however, that homeowners will still need to come up with a significant down payment, and loan eligibility rules will be much stricter than in the past.

To qualify for a fixed-rate mortgage, for example, Fannie Mae requires a 90 percent loan-to-value ratio, which means the maximum loan will cap out at 90 percent of the appraised value of the home. For adjustable-rate mortgages, the loan-to-value ratio cannot exceed 80 percent. Buyers must have a minimum credit score of 660 and cannot spend more than 45 percent of their gross monthly income on housing, installment loans, child support and revolving debt. In addition, the home must undergo a full interior and exterior inspection as part of the appraisal process.

Prior to the stimulus package, Fannie Mae and Freddie Mac, two private corporations sponsored by the federal government, guaranteed home loans up to $417,000 by buying them from banks, packaging them into large bundles and selling them on Wall Street to investors. But loans greater than $417,000 were not backed by Fannie Mae or Freddie Mac, making them much riskier for lenders.

In high-cost cities, average home prices exceeded the maximum loan backed by Fannie Mae and Freddie Mac, so homebuyers were often forced to borrow from subprime lenders, obtaining adjustable mortgages with low teaser rates that exploded by hundreds of dollars a month when the loan terms reset.

Raising the cap will allow thousands of borrowers to access loans backed by Fannie Mae or Freddie Mac, or refinance their existing homes into more affordable monthly payments.

Trade group seeks permanent change

The National Association of Realtors is one of several organizations pushing for a permanent increase in the government-sponsored conforming loan limit. The group urged the U.S. Senate to raise conforming loan limits to $625,000, with an additional boost to 125 percent of the median sales price in high-cost areas.

The group estimates the change would allow more than a half-million borrowers to refinance their homes, save 210,000 foreclosures, lower inventories of available homes, and raise home prices — which are depressed across the country — by 2 to 3 percent. They also argue it would boost sales of new and existing homes by about 350,000.

However, Michael Sichenzia, chief operating officer of Deerfield Beach, Fla.-based Dynamic Consulting Enterprises, worries that the stimulus package does little to address the fundamental problem of why so many homeowners are buying into homes they cannot afford, based on applying old-fashioned underwriting standards.

“Go back to one-third of your household income going to your house,” said Sichenzia, who counsels homeowners on how to work out their debts. “We’re not really addressing that with any of the things that are out there today. We’re just pushing the snowball down the hill and we’re actually giving it a nudge.” 

Real estate experts say homebuyers shouldn’t use the stimulus package to make an impulse home purchase. They should think hard about whether they have the financial ability to handle the payments and withstand the scrutiny that comes with it.

“Make a judgment on whether you should risk buying something,” says David Erickson, president of the Washington Association of Mortgage Brokers, based in Edmonds, Wash. “If you’re just doing this to speculate and flip a house, step away from the table and go away.”