There are two basic loan types, conforming and jumbo, and are labeled as such based upon loan limits. Conforming loans, those underwritten to either Fannie Mae or Freddie Mac guidelines, follow certain specifications both lay out in order to qualify for sale in the secondary market. Today, the conforming loan limit is $453,100 in most parts of the country. Each fall, the Federal Housing Finance Agency, or FHFA, reviews the national median home values and compares that amount to the previous year. If there’s an increase, conforming loan limits will be adjusted accordingly for the following year. This review repeats itself in October and new limits are released in November.
Any loan above the conforming limit is then considered a jumbo. Jumbo loans are processed and approved in much the same manner as conforming loans as it relates to qualifying. Yet there is not a secondary market in which lenders buy and sell jumbo loans. Instead, the individual lender will approve and fund the loan. The lender can keep the loan or sell to institutional investors. Jumbo loans will have slightly higher rates, ranging anywhere from 0.375 to 0.50% above prevailing conforming loans.
But there’s a third category that falls in between a conforming and jumbo amount, and it’s referred to as a “high balance conforming.” Such loans are offered in areas that are deemed “high cost” as home values are much higher than in most other parts of the country. High balance conforming loans can then be sold in the secondary market just like a conforming loan. This loan limit will vary based upon location, but the maximum high balance loan limit currently is $679,650. All such limits are for single family homes; 2-4 units will have higher conforming loan limits. High balance loan guidelines are similar to conforming guidelines with the exception of the loan amount.
If you expect your ultimate loan amount will be slightly higher than the conforming limit and you want to avoid getting jumbo rates, there are other options such as an 80-10-10 loan. This structure keeps the first mortgage at 80 percent of the sales price, thus avoiding PMI, and a second mortgage at 10 percent of the sales price. At the same time, the first mortgage then dips below the conforming loan limit. If you’re not in a high cost area and the high balance conforming loan isn’t available, work with your loan officer to see if there are other options that might work.
