The New Conforming Jumbo Loans

Months ago, Congress authorized FannieMae and FreddieMac to offer home loans larger than the normal loan limit of $417,000. There has been a lot of hoopla about these loans and they have been eagerly anticipated in high-cost markets where the $417,000 limits are inadequate for the needs of the marketplace.

Fannie and Freddie have finally gotten around to setting the rules and the loans are available. There is a big plus in that they will do larger loans. But, as with any program, there are some minuses too in that there are a lot of restrictions. Let's review the features.

Loan size

There is an absolute upper limit of $729,750 but there may be a lower limit determined by home values in each county. The top loan limit may not exceed 125% of the average value of homes in the county. For example, in my area (Los Angeles and Orange Counties), the loan limit is $729,750, but the limit is only $697,500 in San Diego County. It is only $500,000 in nearby San Bernardino and Riverside Counties. Some counties with lower average values will still be limited to $417,000.

Loan to Value

The rules vary slightly between FannieMae and FreddieMac but generally for purchase transactions using fixed rate loans , the balance may not exceed 90% LTV for borrowers with credit scores of at least 700. For those with less than 700 scores but higher than 660, the maximum LTV is only 80%. Borrowers with FICO scores below 660 will need to go elsewhere.

For FannieMae Adjustable loans, the maximum LTV is 80%. For refinance transactions, the maximum LTV for the new loan is 75% but the program will allow subordinate financing – a second – to a maximum LTV of 95%.

FreddieMac does not make a distinction between Fixed and Adjustable loans, and LTVs vary slightly. LTVs for second homes and investment properties is 60% for both entities.

Declining Market Effect

FreddieMac will cut back LTVs by 5% in counties determined to have declining values. Given that most of the counties where values are higher are also the ones where values are suffering, this restriction will have an impact. It appears that FannieMae will NOT invoke the LTV cut-backs in declining market areas. Perhaps they feel that their rules are restrictive enough.

Cash-out and Subordinate Financing

FannieMae will not allow cash-out transactions. Even worse, they will NOT do a new loan that combines an existing first and second. Existing subordinate financing must be re-subordinated. That prevents someone who originally got piggyback financing – two loans instead of one - to pay both of those off with a new, larger loan.

However, FreddieMac will allow cash-out refinance loans to a maximum of 75% LTV and they will allow combining two loans into one new loan. The minimum FICO score is higher for these loans: 720.

Underwriting

All loans require full documentation – i.e. no stated income loans. Traditional guidelines are to be followed, like two years W-2s or tax returns for self-employed borrowers instead of one year's worth. Bank statements for three months are required. All FannieMae loans must be manually underwritten, but FreddieMac will allow use of their automated underwriting program, Loan Prospector.

On all programs, the maximum Debt to Income ratio is 45% and I suspect that there is no negotiation on this.

Pricing

These loans come at a premium. The one I have locked was .75% (3/4%) higher than the loans under $417,000 on the same day. The rate was 6.375% compared with 5.625%. This is higher than the traditional difference between Conforming and Jumbo rates, but only slightly. It is still significantly better than the "real" Jumbo rates that are so high today – like 8% or 9% - that it makes them effectively useless.

Summary

Obviously, there is an attempt to fill a market need here given that there are a number of areas where there is a need for Jumbo financing. For markets like mine, they will help borrowers get into houses and I hope it will jump-start the real estate market out of the doldrums.

It will also allow refinance transactions in which the borrowers will get significantly lower rates. But if it is not obvious by now, figuring it all out is like stepping through a minefield. If you need a loan like this, choose your lender very carefully because the twits that answer the phones at many lenders will NOT know the correct answers to important, potentially deal-breaking questions.

Return to Top