Jumbo loans just got bigger. Beginning 2018, the conforming loan limit on a one-unit home in most parts of the U.S. will increase to $453,100 from $424,100. In high-cost counties, the standard loan limit will also increase to $679,650.
Those borrowing money higher than the standard conforming loan limits belong to the jumbo loan club. Qualifying for jumbo loans is tougher than on traditional loans because of inherent market risks and individual lender standards.
Conforming Loan Limits Boost Jumbo Loans
The Federal Housing Finance Agency who regulates Fannie Mae and Freddie Mac has raised the conforming loan limits to reflect a 6.8% increase of home prices in the U.S. based on the seasonally-adjusted expanded-data House Price Index (HPI).
Consequently, the 2018 conforming loan limit is $453,100 and it can reach $679,650 at most to account for one-unit homes in expensive counties in the U.S.
A list of 2018 conforming loan limits is accessible here.
Fannie Mae and Freddie Mac purchase loans within those loan limits, thereby known as conforming loans. The GSE loan limits also affect other government loan programs.
For example, VA loans match GSE loan limits to calculate the amount of VA guaranty. FHA loan limits in high-cost areas are based on Fannie/Freddie loan limits.
Because jumbo loans fall outside of standards set by the GSEs and relevant government agencies, they are underwritten by individual lenders.
Qualifying for Jumbo Loans
The territory of jumbo loans is vast. These loans for bigger homes for property flippers, investors and more are offered at varying terms and conditions.
In terms of process, applying for a jumbo loan is no different from the usual standard loan because lenders will still weigh these qualifications:
- Credit scores on jumbo loans may be higher or at par with conforming loans. There might be some wiggle room for borrowers with less-than-perfect scores but they’ll get higher rates than those with excellent credit.
- Debt-to-income ratio is ideally 43% and below. But ample cash reserves of at least six to 12 months can possibly make up for an above 43% DTI or a low credit score for that matter.
- Down payments are usually higher on jumbo loans. They can be at least 10% up to 30% of the purchase price, depending on the lender.
Documenting income is tricky for self-employed borrowers taking out traditional loans. For jumbo loans, lenders might require just one year of tax returns filed with the IRS to document income from a stable or growing business.
To be fair, Fannie Mae has eased its guidelines in documenting self-employment income, requiring only one year of filed tax returns to qualify for a conforming loan.
Rates on jumbo loans are higher than on conforming loans because they carry the risk of not being eligible for purchase by Fannie Mae or Freddie Mac.
If you’re buying a home in a high-cost area, your loan might still be within conforming standards. Ask lenders about this and other loan matters.