Mortgage loan limits for conforming loans will take effect on January 1 of next year. For 2020, the conforming loan limit for a single family home will be $510,400, up from $484,350 in 2019. Higher limits will also apply to a duplex, triplex and fourplex. What, exactly is a conforming loan?
A conforming loan is one that meets the guidelines issued by Fannie Mae and Freddie Mac. This is important because the more competitive mortgage rates in today’s marketplace are reserved for conforming loans. By far the most popular among residential borrowers, nearly two out of every three mortgage loans made follow these guidelines. This results in lower rates for conforming loans compared to other types of mortgages. Borrowers may elect to put more money down on a purchase in order to get to the maximum conforming loan limit. Higher end borrowers on the other hand will take out a jumbo loan.
A jumbo loan is one where the loan amount exceeds conforming loan limits, both for standard conforming loans and high balance conforming loans. Interest rates for jumbo loans can be as anywhere from 0.25% to 0.50% higher than those reserved for conforming loan amounts. In 2020, minimum jumbo loan amounts will exceed the prevailing conforming loan limits of $510,400 in most parts of the country. There are also areas where home values are much higher compared to other parts of the country. This means a conforming loan limit can be higher in places such as Denver or Miami compared to homes located in say Wichita, KS or Albuquerque, NM. Such areas are labeled “high balance” but still fall into the conforming category and eligible for sale in the secondary markets because they meet guidelines established by either Fannie or Freddie. In these geographic areas, a mortgage will be labeled jumbo if the loan amounts are higher than prevailing conforming limits.
Jumbo loans follow basically the same set of approval guidelines as other mortgage types, but they are slightly more restrictive for an approval. Jumbo loans will ask for a down payment of at least 20% of the sales price of the home. Lenders can also provide slightly better terms with a 25% down payment. Conforming loans on the other hand can only require a down payment of as little as 3.0% of the sales price. Of course, when the loan amount is greater than 80% of the value of the home, private mortgage insurance, or PMI, will be required. An additional PMI payment increases the overall monthly mortgage payment for a borrower but still preserves borrower assets. With a jumbo loan, there are no private mortgage insurance policies available, hence the minimum 20% down payment.
Credit scores for jumbo loans can also be higher. Conforming loans can require a minimum credit score as low as 580 whereas a jumbo loan can require a minimum credit score to be 720 or even higher.
In 2020, because the conforming loan limits will increase, so too will the minimum loan amount for a jumbo loan. In most areas, the minimum loan amount to qualify as a jumbo loan will be just above $510,400 for a single family home. For a two-unit property, the conforming loan limit rises to $653,550. A three-unit property will limit the loan amount to $789,950 and a four-unit home to $981,700. Loan amounts above these limits will fall into the jumbo category.
Higher loan limits and the increase in the minimum jumbo loan amount won’t directly affect approval guidelines. Those guidelines are set by the lender offering the jumbo loan such as minimum credit scores, down payment and employment. Jumbo loans are typically “verified” which means income, assets, employment and other aspects are verified through third parties. When higher jumbo loan amounts are needed, standard approval guidelines will be followed.
Jumbo loans can also be refinanced from one jumbo loan to a new one. Or, with higher loan limits coming in 2020, borrowers with existing jumbo loans may be able to refinance into a conforming loan resulting in a lower loan amount and a slightly better interest rate. When considering a jumbo loan for a purchase or thinking about refinancing, a visit with your loan officer should be next on your list.