Conforming loan limits for 2020 have recently been announced. Each year in October, the Federal Housing Finance Agency, of FHFA, collects data on the national median home value and compares that number from October of the previous year. If there is an increase, the conforming loan limit will increase by the same amount. Conforming loans are those that “conform” to guidelines set forth by Fannie Mae and Freddie Mac.
In October it was noted the year-over-year increase came in at 5.38%. Therefore, the conforming loan limit for next year will rise to $510,400, up from $484,350. The new increase is for a single family home. For multi-unit properties, the limits rise to $653,550, $789,950 and $981,700 for a duplex, triplex and fourplex, respectively. If the year-over-year value remains the same or even falls, the loan limits for the following year be the same.
For loan amounts that are above these limits, they’re referred to as “jumbo” loans. Most loans approved today are those for conforming loans which make up nearly two out of every three residential loans funded. The market for jumbo loans is much smaller. With a conforming loan, lenders are able to sell the mortgage in the secondary market, replenishing their credit lines in order to make more loans. Jumbo loans have no such robust secondary market. When a lender approves a jumbo loan, it assumes the risk should the loan ever go into default. This means jumbo loans are a bit more difficult to qualify for compared to a conforming one. Knowing in advance what most jumbo loans ask for will make for a smooth jumbo closing.
Jumbo guidelines ask for credit scores that can be much higher compared to conforming ones. Minimum credit scores for most conforming loans range from 580 to 620. Jumbo minimums need scores ranging from 720 to 740. There are jumbo loans that can require a lower score but the rates and terms for such products are much more stringent.
Perhaps the most important thing to do when preparing for a jumbo closing is to do nothing at all. That simply means don’t change anything about your personal financial profile. Don’t take on a new job, for instance. One of the standard guidelines for a jumbo approval is to verify income for the most recent 30 day period. When switching employers, it can take upwards to 30 days or more to get a paycheck stub from the new employer verifying the adjusted income. Even if the new job pays more, it’s best to stay put until after the loan has closed.
Down payment requirements for jumbo loans are also much higher. Conforming loans ask for a down payment of just 5% and even 3% for special first time programs. With a low down payment conforming loan, private mortgage insurance, or PMI is needed. PMI is an insurance policy that compensates the lender the difference between the down payment and 80% of the value of the property should the loan go into default. Jumbo loans have no such insurance policies available. That results in a minimum down payment of 20% of the sales price of the home. However, it lends to easier qualifying with a down payment of 25% or more. This can also mean a slightly better interest rate compared to a 20% down transaction.
Finally, don’t apply for any new credit such as a car or credit card. When someone applies for new credit, there will be an entry on the credit report noting the borrower applied for new credit. However, it can take up to 30 days for the new credit line and payments to appear on a credit report. Instead, the lender will see the inquiry but won’t know anything about the details of any new account. There will be plenty of explaining to do with the appearance of a new credit inquiry. The best advice is to wait for any new accounts until after the jumbo loan has closed and funded.
Finally, work with your loan officer and provide all the requested documentation as soon as able. By giving everything up front and answering any questions while the loan is being processed will result in a smooth, worry free approval.