Depending on how much you intend to borrow, your mortgage will fall into two basic categories- conforming and jumbo. A third sub-category exists called a “high balance” conforming loan. Why do these classifications matter? Different loan amounts can mean different qualifying procedures and also mean higher or lower interest rates. Your loan officer can help walk you through which type of loan is best for your situation and even offer strategies for selecting the right program structure.
A conforming loan is a conventional loan where the loan amount is at or below $453,100. The conforming loan limit can adjust once per year based upon the national average home value taken from data collected in the third quarter of the previous year. A conventional loan is one where the lender assumes all the risk on the mortgage amount and there is no government-backed guarantee such as with a VA or FHA loan. Conventional, conforming loans today are typically approved using standards issued by Fannie Mae and Freddie Mac. When loans are underwritten by these standards, the loan is eligible for sale in the secondary market. By far most loans that are sold in the secondary market are underwritten by Fannie or Freddie guidelines. These loans will also carry lower interest rates compared to high balance or jumbo loans.
A high balance loan is also a conventional loan but the loan limits are higher compared to other parts of the country. This happens in areas like California, Colorado, Florida, DC, New England, where the median home values are higher. Usually, high balance loans are available in densely populated areas where demand for real estate is relatively high and real estate is located in a high-cost area, as determined by Fannie Mae. The maximum loan limit in most high-cost areas is currently $679,650. Interest rates for high balance loans will be slightly higher compared to a conforming conventional loan.
Finally, there are jumbo loans. Jumbo loans are those where the loan amount exceeds the conforming maximum. Interest rates on jumbo loans can be slightly higher than both conforming and high balance. Jumbo loans typically require a down payment of at least 20% of the sales price, but there are new 95% Jumbo options today that only require 5% down payment. Minimum credit scores for jumbo loans are typically required to be a little higher than FHA and conventional loans.
Jumbo loans are approved in much the same manner as with any other program, the major difference is the amount borrowed. Lenders will also document sufficient reserves and funds to close using copies of your most recent bank statements. To verify your income is sufficient to make the mortgage payment in addition to any other monthly credit obligations you can expect to provide your most recent pay check stubs covering a 60 day period. If you’re self-employed and do not use pay check stubs, your lender will ask for your two most recent federal income tax returns, both personal and business.
Some jumbo loans require income tax returns regardless if you’re self-employed or request copies of your recent income tax transcripts directly from the IRS. Lenders will do this to compare the income reported to the IRS with what appears on your loan application. Yet besides the amount borrowed, jumbo loans are really no different than most any other mortgage program and are approved and documented in much the same manner.
A special note to veterans in search of high balance VA loans – please learn more about the VA jumbo loan here.
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