In this post and video, I will summarize the differences between a conforming loan and a jumbo loan.
The first difference is the loan amount, which is ultimately what defines a conforming loan versus a jumbo mortgage. For 2018, here in Portland, Oregon, the threshold that determines a conforming loan and a jumbo loan is $453,100.00.
A loan amount at that level or less can be underwritten to conforming loan standards, whereas a jumbo mortgage is for an amount in excess of that and is underwritten to jumbo underwriting standards.
I expect the threshold to increase annually overtime.
The second difference is that conforming loans are underwritten to more standardized and simpler guidelines. Fannie Mae and Freddie Mac have produced underwriting guidelines that are applied to conforming loan applications.
For jumbo mortgages, the market is much more fragmented. There are a lot more than two institutions that underwrite jumbo loans and each one has a different set of rules and guidelines. Therefore, the criteria to approve jumbo loans is a lot less standardized than for conforming loans.
As you might have imagined, jumbo loans tend to be underwritten to a much higher standard than conforming loans. Let me give you a few examples.
With regard to credit, typically we see jumbo loans require higher credit scores, and in addition, the applicant must have more credit depth, more accounts and history on their credit report, than a conforming loan.
Second, in terms of income, we measure a debt to income ratio for each loan application. This calculation takes into account the amount of obligations as a percentage of the income. We typically see jumbo mortgages limited to a debt to income ratio of 43%, meaning 43% of the household’s income can be allocated to obligations and the new mortgage payment. Whereas with conforming loans, we can typically get applications approved to 45% and in some instances, 49.9% percent. Conforming loans allow for higher levels of monthly obligations relative to an applicant’s income.
With regard to assets, under a jumbo underwrite, typically the jumbo guidelines will require that the applicant have a multiple of six times the mortgage payment left over in financial accounts after the down payment and closing takes place. Whereas with conforming loans, when buying a primary residence, the underwriter doesn’t necessarily require us to document any financial reserves.
Lastly the appraisal, or the collateral underwrite are different between these types of loans. With a jumbo mortgage we typically always need an appraisal, and in some instances, we might need two appraisals and/ or a review appraisal on top of the initial appraisal. With regard to a conforming loan, we can typically get the loan approved with an appraisal and in some instances even that is waived.
In terms of rates and fees, currently the jumbo and conforming loans are pretty similar, but at times you do see small differences between the two. The bottom line is the conforming loans will be a little less cumbersome to be underwritten compared to a jumbo mortgage. If you have questions about qualifying for either, I would love to be a resource, contact me today. Thank you.