If you are hoping to buy a home in one of the country’s pricier markets, you may need a special type of mortgage. The main two are jumbo loans and super conforming loans. Here’s what you need to know about each one and which is right for you:
Background on the Mortgage Market
The U.S. government sets limits on how much of a mortgage it is willing to guarantee. There are two government-backed entities – Fannie Mae and Freddie Mac - that buy back home loans, package hundreds of them in bundles and resell them in small bits on the secondary market. Mortgage lenders like to sell off the mortgages they make so they can free up cash to make more loans. So, the regulatory Federal Housing Finance Agency (FHFA) determines the annual level and any lender who wants to sell loans back must make sure they fit within the price tag. These types of mortgages are called “conforming” loans because they adhere to the federal guidelines. Of course, it is difficult to set just one limit for the entire country since real estate prices vary so much from region to region. The FHFA assigns higher limits in high-cost areas. For example, for 2021, the conforming loan limit will be $548,250 for the majority of the U.S. (115% higher than the national average) and $822,375 in the top markets.
What is a Super Conforming Loan?
A super conforming loan is one that falls within the higher loan limit in a pricier area. These mortgages are also called high-cost or high-balance loans. They were created by Fannie and Freddie to accommodate buyers in expensive areas. They provide the same guarantees to lenders as conforming loans, giving incentive for lenders to make those large mortgages.
Super conforming loans are available in fixed-rate or adjustable-rate form. Down payments can be as low as 5% with certain programs. These loans can also be used to purchase primary or investment property (up to four units), and they can be used to buy a single-family vacation home.
What is a Jumbo Loan?
A jumbo mortgage is one that has a higher total than the conforming loan limits, even higher than super-conforming levels. There are certain areas of the country (i.e., San Francisco, New York City) where the median home price is higher than even the super conforming limit and the government is only willing to back so much of that debt. Jumbo loans are the answer in these situations. All the same loan options are available, but because they do not have full government backing, jumbo loans involve more risk and lenders will usually have stricter qualifications. This might include higher credit scores, and larger cash reserves. Larger down payments are also typically required. For example, you might have to put a full 20% down for loans up to $1 million, and 30% for loans over $2 million.
Which One is Better?
If you meet the requirements for a super conforming loan, it will often provide you with more options and sometimes lower costs. If you the property you want to buy is higher than the super conforming limit but you don’t want to go with a jumbo loan, increasing your down payment could help bring you within the super conforming limit. Jumbo loans are still a great tool though, and the interest rates can be just as competitive as conforming mortgages during hot housing markets.
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