For those who are somewhat familiar with the mortgage industry, they probably have heard the terms “conforming” and “jumbo.” These two terms refer primarily to loan approval guidelines. A conforming loan is one that meets guidelines set by either Fannie Mae or Freddie Mac. A loan that “conforms” to either of these standards is then eligible for sale in the secondary markets.
Why is that important? When a mortgage company issues a new home loan, it doesn’t open up its bank vault and withdraws some cash and uses those funds to finance a new mortgage. Instead, mortgage companies finance homes using an established line of credit.
When a loan is made and it conforms to Fannie or Freddie Mac guidelines, it can be sold which then frees up more funds in the lender’s credit line, allowing it to make still more home loans. Loans can be sold directly to Fannie Mae or Freddie Mac or even to other mortgage companies.
These increases in loan limits for a long period of time were somewhat arbitrary. Fannie Mae would review national home prices and increase the conforming loan limit. Freddie Mac would then follow suit. Yet a new standard was set into place as a result of the formation of the Federal Housing Finance Agency, or FHFA. FHFA created a new method to establish conforming loan limits for the following year. This standard was set nearly 10 years ago.
Each October, the FHFA compares the national median home value with values one year earlier. If there is an increase, conforming loan limits will rise by the same percentage. The new loan limits are announced in late November. For 2020, the conforming loan limit will rise by 5.38% compared to 2019 limits due to the 5.38% rise in home values.
On the other hand, if home values remain the same or even fall from one year to the next, the conforming loan limits for the following year will remain the same.
But there is a third category of loan limits. This category is labeled as “high balance” and reserved for areas where median home values are much greater compared to the rest of the country. Places such as Miami, Denver, San Francisco, Los Angeles, Honolulu, etc command higher home prices and the high balance conforming limits will apply. These limits can vary by location but also come with maximum loan limits. For high balance areas, the maximum conforming limit can be as high as $765,000 for a single-family home. Two-unit, three-unit and four-unit limits will be $980,325, $1,184,925 and $1,472,550 respectively for these areas.
States that have high cost areas include California, Colorado, Connecticut, the District of Columbia, Florida, Georgia, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Utah, Virginia, Washington, West Virginia and Wyoming.
* See the map below all locations NOT in grey have higher loan limits.
High balance conforming loan limits generally have interest rates slightly higher than those reserved for conforming loans yet still a bit lower compared to jumbo rates. A jumbo rate for a standard 30 year fixed rate loan might be as high as 0.50% more than a conforming loan. At the same time, a high balance rate in a designated area might be something closer to 0.125% to 0.25% greater than a standard conforming loan.
Conforming, high balance conforming and jumbo loan programs offering different rates for the same loan program also means deciding how much to put down in order to obtain a new mortgage. A conforming and high balance conforming loan will ask for a down payment of as little as 5.0% of the sales price. When a down payment results in a first mortgage that is above 80% of the sales price of the home, private mortgage insurance, or PMI will be required for both a conforming and high balance conforming. There are no PMI policies available for jumbo loan amounts.
There are instances where there is very little difference between the high cost limit and a jumbo loan. In instances such as these, it might be advisable for buyers to make the additional down reach the high cost balance, avoiding the jumbo loan amount. The result can mean a lower interest rate. If for example the loan amount is $780,000 and the high balance conforming limit is $765,000, it may make sense to go ahead and make the additional $15,000 down payment to get to the high balance limit.
Interest rates can and do change daily so when choosing between a jumbo and a high balance loan, speak with your loan officer about the difference in rates and payments. The answers might provide the guidance you need to select the right loan amount.
Buyers that have questions can reach out to us by calling for by filling out the Quick Contact Form on this page.