Buying or refinancing a home in a high cost market? With so many attractive interest rates advertised and loan programs available in the lending environment today deciphering what interest rate and program is needed to successfully pull off your transaction can be something else entirely. Need a big mortgage loan? Read on…
$417k Conventional Conforming Loans
A conventional mortgage is your traditional mortgage loan usually considered to be the cream of the crop in the lending world. Fannie Mae and Freddie Mac purchase loans lenders’ originate in loan sizes up to $417,000 in most markets other than Alaska, Hawaii and Guam and the US Virgin Islands. $417k is also the benchmark loan size traditionally set for non government loans (ie FHA, USDA, VA) with a less than 10% down payment. As little as 5% down on loan sizes to $417k are offered by nearly all mortgage companies. Up until November 2013, Conforming loan sizes contained the best rates and loan terms, more on this later.
$625,500 C0nforming High Balance Aka ‘Super Conforming’
Each county in the US has a loan limit set at $417k. Loans exceeding this amount are also bought by Fannie Mae and Freddie Mac, much like loans at $417k or less as well. A Conforming High Balance Loan also called Super Conforming goes to the maximum counting loan limit as the maximum size loan a borrower can apply for and still be considered to be of the conforming variety. Limitations however, come into play on greater than 417k loans. For example a key requirement is a 10% down payment is the requirement. Take Sonoma County, California has maximum Conforming Loan High Balance Limit at $520,950 where San Francisco’s by contrast is up to $625,500 for high cost area. To note: Rates and feesstart to rise on loan sizes exceeding $417,000 through the maximum county loan limit.
Is any loan size $1 or greater than the max set loan limit in any said area. Using our Sonoma County, California illustration, a residential mortgage loan in the amount of $520,951 would earmark this transaction as Jumbo wherein heavier credit and equity requirements come into play.
If you can support the debt, the maximum residential mortgage loan you can get with a stellar financial profile…….drum roll please……
$3 million, yes you heard that right, that’s a three with six zeros behind it and you’re going meet some lofty credit requirements.
- a 760 credit score
- 25% down
- must be a single-family home
- a low debt to income ratio
Credit and equity set the tone for not only rate and price but also the debt allowance. Jumbos have a much stronger debt to income ratio requirement- your total loan payment with other obligations cannot be more than 43% of your pretax monthly income. Consumers do be aware- there are mortgage lenders aggressively pursuing the Jumbo market as niche providers. In doing so, some are offering Jumbo Loans even up to a 50% debt to income ratio, something not heard of in the conventional space since the demise of the stated income loan.
Alternatively, the Jumbo credit requirement does change based on occupancy. Take a high net worth borrower looking to finance a Jumbo sized mortgage for a vacation property i.e. second home. The maximum loan size an individual would be able to apply for within the residential space is up to $2.5 million with the minimum down payment 35%, still with the same 760 credit score threshold. Conversely, the max conventional sized mortgage loan, will finance a second home all the way to 10% down on primary home or a second home where the Jumbo loan wants more skin in the game in terms of down payment, but with adjustment $500k lower in lower amount compared to a primary home.
Last but, not least, there’s the investment property, as you have guessed, the Jumbo limitations increase even more, financing only a maximum loan amount up to a $1 million with the same 35% down requirements coupled with at least a 740 credit score or. 20 points lower in credit score, for reduction in $1.5 million in maximum loan amount stacked against a second home transaction.
Putting It Together For The Best Rate & Pricing
As the economy continues to slowly improve, banks and mortgage lenders will stay on course in their desire to capture bigger mortgages. This appetite bank have for Jumbos, began back in November 2013 when the mortgage industry experienced the phenomenon of Jumbo Mortgages pricing out more competitively with better rates and terms than it’s Fannie/Freddie counterparts. Traditionally, in lending the bigger the loan size, the higher the interest rate moving into loans exceeding the max county loan limit as the Jumbo Loan pool was always much smaller in relationship to the pools loans bought by Fannie Mae and Freddie Mac. Because there was less rather less outlets, to place these loans with, they used to cost more, not the case any longer. The bigger loans continue to remain lower priced in terms of interest rate and fees than Conventional Loans, indicative of banks’ desire to acquire high-end consumers.
Most lenders’ interpretation of a Jumbo sized mortgage is anything larger than the maximum loan limit per the county where the property is located. Although, this viewpoint is not necessarily shared amongst all mortgage companies, take this approach for example-there some Jumbo investors will allow the lender to give the consumer a Jumbo Program on any loan size bigger than $417,000 even on Super Conforming Loans! If you plan to mortgage comparison shop, make sure to ask about this feature.
*Remember credit score and equity are the two biggest factors that determine interest rate on any size of loan, even more so on Jumbos.
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