Loan options overview -> Conforming vs. Jumbo

Conforming vs. Jumbo

The interest rate differential between conforming loans and jumbo loans
has been steadily narrowing.

Bay-Area-loan-limits-grpahic-master.1The interest rate for conforming loans and high-balance conforming loans has historically been lower – usually by well over half a point in interest rate – than the rate for jumbo loans. This is rapidly changing, and it is becoming increasingly likely that the price advantage that these loans have enjoyed may disappear completely in the next few years. Although conforming loan rates are still lower than jumbo rates, high-balance conforming loan rates are not.

The current conforming loan limit for a single family residence, $417,000, is a number to remember because conforming loans have a lower interest rate than either high-balance conforming loans or jumbo loans. Conforming loans may also be easier to qualify for and allow higher loan-to-values, especially if you are buying a 2-4 unit property or an investment property. Borrowers whose loan amount is above the $417,000 conforming limit often consider combining a HELOC with a conforming loan, rather than pay the higher interest rate on a jumbo or high-balance conforming loan. Conforming and high-balance conforming loans meet criteria that allow them to be purchased and securitized by a government sponsored entity (GSE), either Fannie Mae or Freddie Mac.

Conforming Loan guidelines and pricing

All conforming and high-balance conforming loans have uniform guidelines for income, credit, and other underwriting standards. The enormous numbers of conforming loans securitized by Fannie Mae and Freddie Mac makes the pricing of these loans generally more transparent and uniform than the pricing for jumbo loans.

 
The primary criteria which defines a conforming loan is the maximum amount of the loan, currently $417,000 for a single family residence in all states except Alaska and Hawaii, where the maximum loan amount is $625,500. The federal overseer of the GSEs also allows them to purchase larger loans in certain counties which have higher home prices. These are called high-balance conforming loans, and depending on the county where the property is located, have a maximum limit of up to $625,000, except in Alaska and Hawaii. A list of high-balance conforming loan limits by county can be found here.

Jumbo loans are those with a loan amount greater than $417,000. In areas which have high-balance conforming loans available, if your loan amount is over $417,000 and not over the high-balance conforming limit, you have the option of either a high-balance conforming loan or a jumbo loan. If you can qualify for either jumbo or high-balance conforming, choose the one with the lower rate.

Jumbo loans do not have the standardized guidelines of conforming and high-balance-conforming loans. If you are having difficulty qualifying for a jumbo loan with one lender, it is possible that a different lender or mortgage broker may be able to help you.