Conforming vs. Jumbo 

In light of the recent liquidity crisis involving the financial institutions in the mortgage lending arena, a home buyer or homeowner must know the difference between the two. The current conforming loan limit is $417,000 and below. Conforming loan limits change annually. Fannie Mae and Freddie Mac establish the loan limits for their guidelines to establish a standard in which they will purchase loans. These government institutions are continuously in the market for conforming loans so the banks have greater liquidity originating these loans.

Jumbo loans are considered nonconforming and the ability to sell these loans in the secondary market have caused liquidity issues for banks. Anything over $417,000 must abide by different set of standards and the quality of these loans has been scrutinized in underwriting. The banks understand that these loans will more than likely become a portfolio loan because the secondary market does not currently have an appetite for jumbo loans. In addition to stricter underwriting standards, the rates are much higher than in the previous years. It is a simple supply and demand issue and in order to make these loans saleable they have to carry a higher interest rate and thus a higher yield to the investor that buys the loan. This is now one of the major reasons to avoid a jumbo loan if possible.

There are a couple of strategies to keep the loan amount at or less than $417,000. The obvious strategy is to buy a house less than the limit or make sure you put down enough money to keep the loan conforming. One of the most popular strategies is to split up the debt into a first and second mortgage. For example, if the loan amount was $650,000 the first mortgage would be $417,000 and the second mortgage would be $233,000. Since the bulk of the debt is on the first mortgage it yields an overall lower payment. The lower payment can help the borrower qualify with a lower debt to income and also allow the borrower the freedom of selecting from a wider variety of loan programs.

Keep in mind that these limits go up annually and the reports should be out soon if Fannie Mae and Freddie Mac have decided to raise the loan limits. States like California have been pushing for them to raise the limits because most of the states median value is over the conforming limit. Make sure you keep this in mind the next time you are house hunting or looking to refinance. You could end up saving yourself a lot of money.

Happy New Year,

Ben Hawkins

President

Home Loans in Arizona

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Direct~602-410-6388

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