Gov Jumbo vs. Private Jumbo Loans Today

Government-backed jumbo loans can be cheaper and easier to get than jumbos that exceed the $625,500 federal limit

https://i0.wp.com/si.wsj.net/public/resources/images/BN-JS449_JCONFO_M_20150805104039.jpgSave Money With Smaller Jumbos by Anya Martin in The Wall Street Journal

Home buyers trying to purchase a pricey property will probably need a jumbo loan—a mortgage that exceeds government limits. But there are different types of jumbos, and some are a little easier and cheaper to get than others.

But first, a handy breakdown for those befuddled by the confounding terminology of the mortgage business:

Conforming mortgages are capped at $417,000 and backed by government agencies, such as Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Veterans Administration (VA).

Conforming jumbo mortgages exceed $417,000 and can go up to $625,500—the exact limit depends on housing costs in your area. The loans are sometimes called “super conforming loans” or “agency jumbos” because they’re still guaranteed by government agencies.

Jumbo mortgages exceed government limits and, thus, are typically held by the lender as part of its portfolio or bundled and sold to investors as mortgage-backed securities.

Borrowers typically pay lower interest rates on conforming loans than on non-conforming jumbo mortgages. (Rates and qualification requirements vary by lender.)

Escalating home-sales prices are pushing more buyers into both conforming and non-conforming jumbos, says Tim Owens, who heads Bank of America’s retail sales group.

Jumbo mortgage volume totaled about $93 billion in the second quarter of 2015, up 33% over the first quarter, according to Inside Mortgage Finance, an industry publication.

The volume of government-backed conforming jumbos also saw brisk growth, increasing 32% between the first and second quarters to $34.2 billion—more than double since a year ago, Inside Mortgage Finance data show.

“The agency jumbo market is firing on all cylinders—purchase, refinance and every loan program,” says Guy Cecala, publisher of Inside Mortgage Finance. The biggest jump was in FHA jumbo mortgages, with volume up 136% between the first and second quarters, he adds.

The spike in FHA mortgages, in particular, comes after the agency on Jan. 26 reduced its required mortgage insurance premiums, Mr. Cecala says. Premiums dropped from 1.35% to 0.85% of the balance on fixed-rate FHA loans with terms above 15 years.

More lenient credit requirements spur borrowers to prefer agency jumbo mortgages over non-conforming loans, says Mathew Carson, a broker with San Francisco-based First Capital Group. He is working with a professional couple borrowing $511,000 for a home in Petaluma, Calif., where the government’s loan limit is $520,950. The couple, both first-time home buyers, could opt for a conforming or a non-conforming jumbo loan but chose a conforming jumbo backed by the FHA. Why? The FHA mortgage required a 3.5% down payment, whereas lenders for a non-conforming loan could require the standard 20% down payment.

Fannie Mae and Freddie Mac also reduced their minimum down payments to 3.5% of the loan amount in December.

Another benefit to conforming loans is lower credit-score requirements, with minimums in the 600s for Fannie Mae and Freddie Mac mortgages and in the 500s for FHA loans, says Tom Wind, executive vice president of home lending at Jacksonville, Fla.-based EverBank. Most lenders prefer to see 700 and above for their privately held jumbos, he adds.

An increase in the volume of VA mortgages is most likely due to more awareness of the benefit among active military and veterans, says Tony Dias, Honolulu branch manager of Veterans United, which specializes in VA loans. In Hawaii alone, Veterans United’s loan volume for 2015 is projected to reach $320 million, he adds.

Here are a few more considerations when choosing between a conforming and a non-agency jumbo mortgage:

• Mortgage insurance. Fannie Mae and Freddie Mac mortgages with less than a 20% down payment require mortgage insurance, but borrowers can drop the insurance once their loan-to-value (LTV) ratio dips below 80%, meaning the loan amount can’t exceed 80% of the value of the home. FHA borrowers must pay the insurance for the duration of the loan, adding to the lifetime cost of the loan, unless they refinance.

• Bonus for veterans. VA jumbos require no mortgage insurance and no down payment unless the amount borrowed exceeds the area’s conforming-loan limit. Even then, the 25% down payment only applies to the amount above the loan limit, so, for example, a borrower would only have to put down $25,000 on an $821,000 loan in Honolulu where the limit is $721,050, Mr. Dias says.

• Additional lender restrictions. Fannie Mae mortgages can have a debt-to-income ratio (DTI) as high as 50%, meaning the borrower’s monthly expenses can be as high as 50% of her gross monthly income. Most lenders typically stick to 43% DTI (prescribed by federal rules for privately held qualified mortgages) for their conforming jumbos as well, Mr. Carson says.

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