Starting October 1, 2011, "Conforming" (think Fannie and Freddie) and FHA loan limits are set to be lowered nationwide as the federal government looks to lessen its footprint in the business. This means the current loan limit of $729,750 in Los Angeles that we've gotten used to the past several years will be reduced to $625,000 this fall.
So why does this matter to you? Since most buyers rely on the low rates, smaller down payment requirements and the easier underwriting guidelines offered by these government backed loans, the market is going to lose a tremendous amount of its purchasing power.
When purchasing power decreases it puts downward pressure on sales prices. For sellers in certain price ranges, this means fewer qualified buyers this fall. For buyers, this will put many properties out of reach.
For example: with the conforming loan limit at the current $729,000 the average buyer with 20% down payment can buy at $910,000 house. When the conforming loan limit decreases back to $625,000, the average buyer with 20% down payment can afford a $780,000 house. Today an FHA buyer with the minimum 3.5% down payment has the power to buy a $755,000 property. After October that max purchase price drops to $646,000.
Of course there is, and will continue to be financing far above these loan limits. However, these "non-conforming," or jumbo, loans may have higher interest rates, are more difficult to qualify for, require a larger down paymnet, and require more post-closing cash reserves by the borrower. It's also important to know that these higher loans are not backed by the government, so in turn the jumbo loan product varies significantly from one bank to the next, and one lender to another. It is not "one size fits all" when it comes to jumbo loans.