Conforming and Jumbo Loans for Mortgages

This delicious tidbit of information can save you big bucks: Conventional mortgages that fall within Fannie Mae’s and Freddie Mac’s loan limits are referred to as conforming loans. Mortgages that exceed the maximum permissible loan amounts are called jumbo loans or nonconforming loans.

When Congress passed the Economic Stimulus Act of 2008 (The Act), it also created a brand-new type of mortgage neatly notched between a conforming loan and a jumbo loan. Now, there are three tiers of mortgages:

• True conforming loans include loan amounts up to $424,100. These loans, also called traditional conforming loans, have the lowest interest rates.
• Jumbo conforming loans encompass loan amounts from $424,100 up to a maximum of $636,150 and are designed for high-cost areas (the precise amount varies by area). Some lenders call these conforming jumbos, super conforming, or jumbo light loans. Whatever. Loans of this size generally have interest rates anywhere from half a percent to a full percent (or more) higher than the true conforming loan.
• True jumbos are loans that exceed $636,150. As you’d expect, the largest loans are also the most expensive. Their interest rates usually run a full percent point or more above jumbo conforming loans.

Fannie Mae and Freddie Mac both imposed tougher qualifying standards on jumbo conforming loans than they have for true conforming loans. Some examples of these tougher standards: Jumbo conforming loans are limited to single-family dwellings, require that you have at least a 700 FICO score if your loan-to-value (LTV) ratio exceeds 75 percent (for Freddie Mac) or 80 percent (for Fannie Mae), and specify that monthly payments on your combined total debt can’t exceed 45 percent of your income.

Fannie’s and Freddie’s jumbo conforming loan programs were originally scheduled to expire December 31, 2008, but Congress keeps extending them, and these programs are still in place as of 2017. Be sure to check with your lender regarding the current status of these loans.

You pay dearly for nonconformity. The higher the loan amount, the bigger the thud if your loan goes belly up. Reducing the loan-to-value ratio is one way lenders cut their risk. To that end, conventional lenders generally insist on more than the usual 20 percent down on jumbo loans.

You’ll probably be required to make at least a 25 percent cash down payment. Interest rates on nonconforming fixed-rate mortgages generally run from 3/8 to 1/2 a percentage point higher than conforming FRMs. When mortgage money is tight, the interest rate spread between conforming and jumbo FRMs is higher; when mortgage money is plentiful, the spread decreases.

If you find yourself slightly over Fannie Mae’s and Freddie Mac’s limit for either true conforming loans or the jumbo conforming loans, don’t despair. You can either buy a slightly less expensive home or increase your cash down payment just enough to bring your mortgage amount under their loan limits or possibly use a small second mortgage.