A very important part of the economic stimulus bill President Bush signed on Feb. 13 allows three government-chartered mortgage programs to make bigger loans.

Many details, such as what the higher loan limits will be in each city, and when the new limits take effect, still need to be worked out.

But those changes should make it easier for thousands of consumers to obtain the money they need to buy or refinance a home, and at lower rates and better terms than they could hope to get today.

The higher limits should provide the most help for:

First-time buyers looking for a modestly-priced home.

Borrowers living in high-cost cities where home prices are far above the national average.

Here’s what you need to know about these changes.

Two federally-chartered companies, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.) generate about 40% of the money used for home loans.

They do that by purchasing loans from banks and mortgage companies, bundling thousands of those loans together, and reselling that debt to investors.

Investors are more willing to buy the debt packaged and sold by Freddie Mac and Fannie Mae because they only buy loans that meet minimum standards for credit worthiness.

Borrowers who can meet, or conform, to Freddie Mac and Fannie Mae’s requirements benefit too, by paying lower interest rates than they would for non-conforming loans.

But one of the standards, established by federal law, is that Freddie Mac and Fannie Mae can’t buy loans for more than $417,000 (in all states except Hawaii and Alaska, which have larger loan limits of $625,500 that remain unchanged.)

That one standard forces many buyers in cities where housing costs are especially high, such as Los Angeles, San Francisco and New York, to obtain more costly “jumbo loans” that can’t be sold to Fannie Mae or Freddie Mac.

The current mortgage crisis was triggered by a rash of defaults and foreclosures on non-conforming loans, primarily subprime mortgages given to borrowers with bad credit who couldn’t meet Freddie Mac or Fannie Mae’s standards.

Although jumbo loans haven’t been a big problem, investors are reluctant to buy any mortgage debt not backed by Freddie Mac and Fannie Mae.

As a result, the average jumbo loan has cost well over 7% since last summer, or a point to a point-and-a-half more than the average for conforming loans.

The stimulus bill temporarily raises the maximum allowable loan for Freddie Mac and Fannie Mae to $729,750 until Dec. 31.

But the maximum allowable limit will only be available in a handful of the most costly cities. Once the new rules are in place, each city will have its own limit based on the local, median home price.

Conforming loans up to $729,750 almost certainly will be available in San Francisco, where the median home price is $846,000. But the limit will probably remain at $417,000 in Cleveland, where the median home only costs $141,500.

Many questions remain to be worked out, such as whether Fannie Mae and Freddie Mac charge higher interest rates and extra fees, or impose stricter standards, for loans over $417,000?

Loans guaranteed by the Federal Housing Administration will also be affected by the bill.

FHA loans were created 70 years ago to help first-time buyers, especially low-to-moderate income families and minorities, get the home financing they need.

Since the federal government guarantees repayment, the lender knows it will not lose money on the deal. That allows the bank or mortgage company to offer competitive rates on a loan that’s easier to qualify for than a conventional home loan.

Click here for more information on how FHA loans can help first-time buyers.

The big problem has been the strict limits on how big FHA loans could be because they didn’t keep up with soaring home prices.

The stimulus bill will allow the FHA to insure loans of up to 125% of an areaâ??s median home price, to a maximum of $729,750, until the end of the year.

That’s far more than the current limit of $362,790 in high-cost cities, such as New York and Los Angeles, and $200,160 in what the FHA considers more “standard areas.”

In the Boston area, for example, one mortgage research firm estimates the new rules will increase the FHA loan limit from $362,790 to $464,165. (The National Association of Realtors estimates Boston has a median home price of $414,700.)

In Metropolitan Statistical Areas that sprawl across more than one county, the loan limit will be tied to the median price in the highest-cost county. In northern California, for example, Contra Costa and Marin counties will benefit from sharing an MSA with San Francisco.

The U.S. Department of Housing and Urban Development, which runs the FHA program, must publish a list of the median home prices and mortgage loan limits for all areas by March 14.

Freddie Mac, Fannie Mae and the FHA will use those prices to establish the new loan limits. Mortgages taking advantage of those limits should be available sometime after that.

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