October 13th, 2011 12:11 PM by Richard T. Cirelli
Conforming vs. Jumbo Financing:
Last week I wrote about the weekly survey of mortgage rates published by Freddie Mac and reported by the media. From the calls and emails that I received I can tell that there is some confusion concerning the types of loans and interest rates so I thought I would elaborate a little further this week.
To read last week’s article, click here: http://www.rtcmortgage.com/Rates+Below+4%25+-+Really%3f
Basically, mortgage loans are categorized into three groups which determine interest rates: Conforming, Super-Conforming and Non-Conforming or Jumbo. Read on for more detail………
The rates that you see published by the media always pertaining to “conforming” loans. These are loans that meet the criteria set forth by the two Government-owned agencies known as Fannie Mae and Freddie Mac plus HUD which oversees FHA loans. These rates always pertain to loan amounts of $417,000 or less. Loans sold to these agencies by all lenders account for 99% of the mortgage financing in the U.S. today. They are called “Conforming” loans because they conform to the guidelines established by these governmental agencies.
Interest rates for Conforming loans are determined by the supply and demand for Mortgage-Backed Securities (MBS’s) which are traded in the financial markets all day long just like stocks and bonds. Therefore, the rates for these types of mortgages change every day and throughout the day. Neither the Fed nor Lenders set these rates.
Super-Conforming Loans or High Balance Conforming Loans:
These are loans also governed by Fannie Mae, Freddie Mac and HUD but they allow larger loans in certain designated “High-Cost” markets. The limit in Orange and Los Angeles Counties is $625,500 -recently reduced from $729,750. Interest rates for these loans work in the same manner as rates for the smaller conforming loans described above with the exception that loans between $417,000 and $625,500 are always about .25% higher in rate than loans of $417,000 or less. Again, the rates are changing all the time and are not set by the Fed or by individual lenders.
Non-Conforming or Jumbo Loans:
This category describes loan amounts above $625,500 that are not saleable to Fannie Mae or Freddie Mac. Accordingly, there are far fewer lenders offering true jumbo loans. IN general, the underwriting criteria and guidelines are stricter than they are for Fannie Mae/Freddie Mac and each lender is free to set their own rates and terms. However, in order to remain competitive I don’t see much variation between all of the lenders offering this type of financing. Interest rates are typically about .75% higher than they are for the loan amounts of $417,000 or less. Lenders typically adjust these rates daily also.
How to Finance More Than the Conforming Limit and Still Get the Low Rate:
Say you need to finance $800,000 yet you want the Super-Conforming Rate? Sometimes we can use what we call a “Piggy-Back” loan where we make a first mortgage for say $625,000 and simultaneously close a Home Equity Line of Credit (HELOC) for the rest – in this example $174,500.
Extension of Loan Limits of $729,750 Dead for Now
Despite efforts by Realtor and Mortgage trade organizations to fight for an extension of Fannie Mae, Freddie Mac, and FHA conforming loan limits, Congress failed to extend the $729,750 loan limits and allowed them to expire Sept. 30. This means the maximum loan amount that Fannie, Freddie, and FHA will buy or guarantee is $625,500, and anything above that amount will be non-conforming and will require a jumbo loan. AS explained earlier, these loans typically carry a higher mortgage interest rate and require a higher down payment, increasing the monthly payment, which will particularly be hard on middle-class buyers and sellers.
Our Government had a perfect opportunity to help homeowners and buyers by extending the loan limits. It just makes no sense to me that they would ignore something that could help so many people without contributing to our national debt. The California Association of Realtors estimated that this would affect as many as 30,000 potential home sales in California.