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Buying or refinancing a home in a high-cost market and need a big mortgage loan? With such low interest rates and the various loan programs available in the lending environment today, determining which is best for you to successfully pull off your transaction can be no minor feat.

Conventional Conforming Loans

A conventional mortgage is a traditional home loan typically considered to be the ideal choice in the lending world. Fannie Mae and Freddie Mac purchase loans lenders originate up to $417,000 in most markets — other than Alaska, Hawaii and Guam and the U.S. Virgin Islands. $417,000 is also the loan limit traditionally set for non-government loans (FHA, USDA, VA) with a less than 10% down payment. Nearly all mortgage companies offer conventional loans up to $417,000 with as little as 5% down. Up until November 2013, conforming loan sizes contained the best rates and loan terms, which I’ll discuss below.

Super Conforming Loans

Each county in the U.S. has a conventional conforming loan limit set at $417,000. However, Fannie Mae and Freddie Mac also buy loans exceeding this amount to allow higher limits in higher-cost areas. This is called a conforming high balance loan, also known as “super conforming,” and goes to the maximum county loan limit as the maximum size loan a borrower can apply for and still be considered to be of the conforming variety. Take Sonoma County, Calif., which has a maximum conforming loan high balance limit of $520,950; San Francisco’s is up to $625,500.

However, loans greater than $417,000 do carry limitations — for example, a minimum 10% down payment is a key requirement. Rates and fees also start to rise on loan sizes exceeding $417,000 through the maximum county loan limit.

Jumbo Mortgages

A jumbo mortgage is any loan size $1 or greater than the maximum set loan limit in an area. Using our Sonoma County example, a residential mortgage loan in the amount of $520,951 would earmark this transaction as jumbo, which brings in heavier credit and equity requirements.

Now, if you can support the debt, the maximum residential mortgage loan you can get with a stellar financial profile is (drum roll, please): $3 million.

Yes, you read that right. That’s a three with six zeroes behind it, and you’re going to have to meet some lofty credit requirements to get it.

Bank on meeting these requirements:

  • A 760 credit score
  • A 25% down payment
  • A single-family home only
  • A low debt-to-income ratio

The credit and equity set the tone for not only rate and price but also the debt allowance. Jumbos have a much stronger debt-to-income ratio requirement: Your total loan payment with other obligations cannot be more than 43% of your pretax monthly income. However, be aware: Some mortgage lenders are aggressively pursuing the jumbo market as niche providers. In doing so, some are offering jumbo loans even up to a 50% debt-to-income ratio, something unheard of in the conventional space since the demise of the stated-income loan (which allowed borrowers to get a loan without providing documentation to show they could afford it). In other words, just make sure you can comfortably make the payments on the mortgage you sign on for. You can use this calculator to find out how much house you can afford.

Alternatively, the jumbo credit requirement does change based on occupancy. Take a high net-worth borrower looking to finance a jumbo-sized mortgage for a vacation property — i.e., a second home. The maximum loan size an individual would be able to apply for within the residential space is up to $2.5 million with a minimum 35% down payment, still with the same 760 credit score threshold. Conversely, the maximum conventional-sized mortgage loan will finance a second home all the way to 10% down on a primary home or a second home, whereas the jumbo loan wants more skin in the game in terms of down payment.

For a jumbo loan on an investment property, the limitations increase even more, financing only a maximum loan amount up to $1 million with the same 35% down requirements coupled with at least a 740 credit score.

Finding the Best Rate & Pricing

As the economy continues to slowly improve, banks and mortgage lenders appear focused to stay on course in their desire to capture bigger mortgages. The appetite banks have for jumbos began back in November 2013, when the jumbo mortgage began to be priced more competitively, with better rates and terms than its smaller conventional Fannie/Freddie counterpart. Prior to that, the jumbo loan pool was always much smaller in relationship to the pool of loans bought by Fannie Mae and Freddie Mac. Because there were fewer outlets to place jumbo loans with, they cost more; that’s no longer the case. Now, the bigger loans continue to remain lower-priced in terms of interest rate and fees than conventional loans, indicative of banks’ desire to acquire more high-end consumers.

Most lenders’ interpretation of a jumbo-sized mortgage is anything larger than the maximum loan limit per the county where the property is located. Although this viewpoint is not necessarily shared by all mortgage companies, you can try this approach: Some jumbo investors will allow the lender to give the consumer a jumbo program — meaning more affordable rates and fees — on any loan size bigger than $417,000, even on super conforming loans! If you plan to mortgage comparison shop, make sure to ask about this feature.

Finally, remember your credit score and equity are the two biggest factors that determine the interest rate on any size of loan, even more so on jumbos. Before you apply for a mortgage, it’s always a good idea to find out where you stand, and see whether you need to take time to improve your credit ahead of time. You can pull your credit reports for free every year from AnnualCreditReport.com, and you can see your credit scores for free on Credit.com.

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