Finance$ August 28, 2023

What’s the scoop on those new jumbo loans?

For 2020, the Federal Housing Finance Agency raised the maximum conforming loan limits, changing the dynamics of loans in general. Let’s talk about conforming loans vs. jumbo loans in the mortgage world.

Conforming Loans:

These are loans whose underlying requirements, terms, and conditions meet the funding criteria of Fannie Mae and Freddie Mac.

The 2020 Guidelines:

In October, the Federal Housing Finance Agency, or FHFA, collected data on the national median home value comparing numbers to October of 2019. As a result, it was an increase, and the conforming loan limit was increased by the same amount.

Going back to October 2019, the year-over-year median home value increased by 5.38%. Therefore, the conforming loan limit for a single-family home in 2020 increased to $510,400, up from $484,350. The loan limits on multi-unit properties increased to $653,550, $789,950, and $981,700 for a duplex, triplex, and fourplex, respectively.

Loan Differences:

Loan amounts at or under these limits qualify as conforming loans. They “conform” to guidelines set forth by Fannie Mae and Freddie Mac. Conforming loans make up the majority of residential loans funded. On the other hand, loan amounts that are above these limits are referred to as jumbo loans. It’s worth noting that with a conforming loan, lenders are able to sell the mortgage in the secondary market, replenishing their credit lines in order to make more loans. However, jumbo loans have no such robust secondary market. When a lender approves a jumbo loan, it assumes the risk should the loan ever go into default.

Rates based on Credit Score:

Naturally, this makes it more difficult to qualify for a jumbo loan. In general, the minimum credit score for most conforming loans ranges from 580 to 620. In contrast, jumbo minimums range from 720 to 740. While some jumbo loans can require a lower score, the rates and terms are much more stringent.

Get Ready to Show Buying Power:

Furthermore, down payment requirements for jumbo loans are also much higher. To clarify, a buyer can secure a conforming loan with a down payment of just 5% (or even 3% for special first-time programs) with the help of private mortgage insurance. However, jumbo loans have no such insurance policies available and require a minimum down payment of 20% of the sale price of the home. **Moreover, providing a down payment of 25% or more will make it easier to qualify.