Jumbo Loans vs. Conforming Loans: Which Is More Suitable for You

Jumbo Loans vs. Conforming Loans: Which Is More Suitable for You

A homeowner securing their mortgage - Jumbo Loans

All About Jumbo Loans

What Is a Jumbo Loan?

A mortgage that is referred to as a jumbo loan is an amount that is considered too big to be backed by the US government.

Jumbo loans are also referred to as non-conforming loans because they fall outside the boundaries of the mortgage limits set the by government-backed mortgage groups Freddie Mac and Fannie Mae. Loan size limits vary and are dependent on the type of home and county.

The standard limit for a condo or a single-family home is set roughly around $480K. It can go up to $680K for areas that are expensive. The regions where homes are relatively more expensive than the average are called high-cost areas.

2019 loan limits are in an upswing from 2018 where the standard was set at $450K. Rising loan limits are a sign of higher home prices. This means homebuyers now have a higher threshold before crossing the jumbo loan mark.

How Jumbo Loans Work

A mortgage is a mortgage no matter what you choose. Whether it’s a jumbo loan or a non-jumbo loan, the process is the same. You borrow a certain amount and you make monthly payments to the creditor.

After the loan is paid off, you are done with the mortgage and have complete ownership of the property. All mortgages follow this procedure after approval.

However, jumbo loans are distinct due to how they are approved. In fact, this is what sets each loan apart. For example, getting approval for an FHA loan varies from getting approval for a VA loan. FHA loans usually require a 3.5% down payment on the home value but a VA loan to purchase property does not require any down payment.

Mortgage rules act as a comprehensive checklist that creditors utilize to get approval on their loans.

How Jumbo Loans Are Different From Non-Jumbo Loans

There are millions of mortgage approvals every year and only 4% of them count as jumbo loans. Within this tiny percentage, mortgage loan providers are designing, funding, and approving loans meant for a small part of the population.

Non-conforming loans are also referred to as portfolio loans as they function as investments for the lenders. Lenders tend to keep these types of loans on their book, collecting payments over a long period since they are bigger loans.

This creates an opportunity for both home buyers and owners who find seeking out conforming loan financing difficult.

For example, some portfolio type loans are created specifically for doctors and have no down payment. Other types have no maximum limit or waive income verification for retired applicants.

There are many different varieties of non-conforming loan types available but since most mortgage brokers do not advertise specific loan types, it is hard to find one suitable for your exact needs. When your preferred lender can’t offer you a jumbo loan, another lender might. Usually, the hardest part of getting a jumbo loan approved is finding the right lender.

How Do You Get Approved for a Jumbo Loan

There are three main steps that stand between you and a jumbo loan approval. They are the same steps followed for any other type of mortgage.

  • Do your due diligence and select a mortgage lender
  • Submit your application along with supporting documents
  • Wait for the decision of the lender regarding approval of the loan

Non-conforming loans are different, as they are preferred to be kept in the books for a long time as an investment. These types of loans do not adhere to government guidelines since they are tailored differently for each scenario.

Lenders set the guidelines for such mortgage loans and the guidelines are usually lenient.

Jumbo Loan Applications and What to Expect

The approval for jumbo loans starts by submitting an application. Getting one approved can be quick or a slog, depending on your reasons for applying.

Homebuyers who can afford an upfront payment of 25% or more and have a good stable income along with a good credit score have no trouble getting approved.

Other categories of jumbo loans have gray areas but that is quite okay since not everyone has the perfect finances.

Some Interesting Jumbo Loans

Jumbo mortgages are also called portfolio loans as they generate interest income. Lenders like to keep them on their books for a longer time.

Since jumbo loans are termed as investments and held as an investment from the lender’s perspective they do not adhere to government guidelines for conforming loans. Portfolio loans are unique and cater to a sub-segment of the population. Here are some examples of jumbo loans.

Doctors’ Loans

The Doctors’ Loan initiative is a mortgage program that was designed for those in the medical profession. These loans are also extended to dentists and vets. There is no down payment required for this type of loan though borrowers can opt to do so. Borrowers are also not required to purchase any mortgage insurance.

This loan program lets doctors finance the complete price of a home up to an amount of $750K. Furthermore, the program can also be used to finance the purchase of a $2 million property with just 10% as down payment.

Jumbo Mortgages for Low Credit Scores

Mortgage seekers with below average credit scores, history of missed payments, recent bankruptcy or even foreclosure can still get a jumbo loan of up to $2 million.

Buyers with below average credit scores can pay a 10% down payment with no mortgage insurance required. To be approved, borrowers must have a minimum of 9 months of monthly payments in their account. In case of rental or vacation property, at least 18 months payments should be held in the accounts.

Cash-Out Jumbo Mortgages

For homeowners seeking to convert home equity into cash using a refinance option, cash-out jumbo mortgages is an optimal loan for this niche.

Jumbo cash-out refinance options are used mostly for people looking to improve their home (value adding) or debt consolidation. Cash from this loan program can be used for any purpose without any restrictions or conditions attached.

Super Jumbo Loans for $3 Million

Super jumbo loans are mortgage options that cater to single family homes, townhomes, and condos worth $3 million with exceptional cases being granted $20 million.

This type of loans allows the borrower to make down payments of 20% of the value of the house and they rarely require mortgage insurance.

Super jumbo loans can have lower rates as compared regular jumbo loans and it depends on a combination of net worth, loan size, and credit rating.

All About Conforming Loans

What Is a Conforming Loan?

A conforming loan is named after the loan’s trait to conform to specific guidelines set by the government agencies mentioned earlier — Freddie Mac and Fannie Mae. They were created to boost homeownership in the US decades ago.

These two government agencies achieve their objectives by purchasing the mortgages from lenders and either keeping them on their own books or selling them again. In any case, by paying lenders for their current mortgages, the agencies free up lenders whose cash is tied up in the mortgage. Thus, the lenders are able to give out more loans after selling it to the government agencies.

The guidelines set by the two agencies are crucial for the ease in selling and buying of the underlying mortgage agreement. That is why these guidelines are widely accepted by mortgage lenders nationwide.

The guidelines put in place by the two companies are set to benefit both lenders and mortgage seekers. The loans provide a form of protection for you as a consumer by setting limits on how much you can borrow and structuring the loan. The biggest advantage of conforming loans is that they usually have lower rates than non-conforming loans.

To be applicable for a conforming loan, you must first fall within the requirements issued by Fannie Mae and Freddie Mac. Though the requirements are specific, they are not strict. The guidelines are as follows:

  • A credit score ranging from 620 to 700, depending on the type of loan and down payment size.
  • A debt-to-income ratio ranging between 35% and 45%.
  • Private mortgage insurance is required when the borrowing amount is in excess of 80% of the purchase price.

How Conforming Loans Work

Conforming loans are issued by all types of agencies dealing in mortgages including banks, lending agencies and credit unions.

There are a few main elements that all conforming loans have in common – credit scores, loan limit, debt-to-income ratio, and down payments.

While Fannie Mae and Freddie Mac have set the guidelines, lenders can choose the applicants at their own discretion. Some lenders even charge higher rates than others.

Conforming loans do not carry a government guarantee or insurance by any government agency. Thus they are a type of conventional loan.

Applying for a Conforming Loan

Since lenders nationwide offer conforming loans, it is highly advisable to conduct thorough research and check for the best rates available.

To be a potential qualifier for a conforming loan, an applicant will have to meet certain specifications. The requirements vary in accordance with the purpose of a loan (purchase of a primary home, secondary home or investment purposes). In addition to the eligibility criteria mentioned before, other broad factors that determine approval are:

  • Credit scores. A higher credit score implies a higher probability of getting approved with a low down payment. Though customers with lower scores still qualify, they might have slightly less favorable terms.
  • The number of units. Requirements vary on the type of property you purchase, whether it is a single family home or a four-unit property.
  • Your reserves. Certain loans require few months’ reserves to be present in your account.

 

Interest Rate on a Conforming Loan

Interest rates that are offered by various lenders on conforming loans differ. Furthermore, in certain cases, you will be required to choose between a fixed rate and an adjustable rate.

  • Fixed rate loan. This is a loan type where the interest rate is predetermined and will not change for the entire duration of the loan.
  • Adjustable rate loan. Loans of these types have a fluctuating interest rate. You rate reflects a certain index that it tracks against market conditions.

Do Both Loans Have Advantages

Neither loan trumps the other. Knowing the right loan type depends upon your financial situation and objectives.

Conforming loans are more common as they have lower interest rates and can potentially save money in the future. These types of mortgage loans have more stability due to the stringent conditions attached.

However, the reality is that there are many properties set on conforming loans are north of the cap. There are many instances that potential homebuyers can take advantage of both these types of loans. Properties that are not covered by the conforming loan limit can have a combination of loans taken out on them. The result is a lower interest rate, lower payments, and an easier application process. The ease of applying for a loan depends more on the mortgage issuer.

However, expensive real estate will always require financing through a jumbo loan. A property worth $2.5 million would be much easier to finance through a single loan rather than multiple loans. Most lenders will also not let you split the loan into multiple loans unless you have a near perfect credit history with large reserves of cash for future payments.  Please also check out www.MortgageNewsDaily.com for additional detailed information on real estate financing.

Andrew Saltman

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