With property values on the rise, this question is becoming more frequent. The question behind the question is why should one consider a “jumbo” over a “conforming” loan? The short answer is simply that some homeowners can buy more, or borrow more, with a jumbo loan.
Conforming loans are those that conform to the guidelines of Fannie Mae and Freddie Mac. The primary guideline that makes it conforming is the size of the loan. Therefore, if the loan amount ends up being at, or under, under the conforming limit there is no need for a jumbo loan. For most property types and regions, the loan limit is $484,350 (CY 2019).
Keep in mind, this conforming limit changes every year, and is not standard across the country. There are high cost areas where the limit may be higher. We call these “High Balance Conforming” loans, where one can borrow more than the conforming limit depending on where you live. The limits in these zones are commonly 150% of the conforming limit. The conforming limits may also be higher for 2 to 4- unit properties.
Sometimes, homeowners will pay higher interest rates for jumbo lending. Therefore, there is an incentive for the borrower to invest enough of their own funds into the mortgage transaction to stay within conforming loan limits. Other borrowers will seek secondary financing for the amount above the conforming limit.
For those borrowers that wish to obtain jumbo financing, the following covers some of the basic requirements:
Loan-to-value (LTV) measures how much is financed compared to the appraised value of the home. The LTV requirements for jumbo loans have loosened in recent years. In some cases, a 5% downpayment on a purchase transaction may be acceptable, meaning a maximum LTV of 95% may be possible. Refinances and loans where the appraiser notates the home is in a declining market will require the borrower to have more equity in the home.
Jumbo loans have credit requirements that are more stringent. After all, there is a lot more risk associated with larger mortgages. Borrowers will generally need high credit scores of 680 or more depending on the property type, loan-to-value, and loan amount.
The borrower will also need to show reserves to ensure the liquidity to pay the monthly mortgage payments. This can be the equivalent of 9 months payments or more depending on the loan-to-value (LTV) and loan amount.
Higher-priced home are often more complex to appraise. Consequently, the fee is often larger. Jumbo values can also vary greatly. Therefore, a second appraisal may be required based on the transaction type, estimated value, and whether the subject property is in a declining market area.