Part II: I keep hearing about how higher conforming loan limits will help the consumer, but in my area jumbo rates are actually equal to – and many times lower than – conforming rates. How does raising the limits help the consumer?
–Gerald from Texas
Last week we discussed why the spread between conforming and jumbo rates has narrowed and at times inverted. This week we move to your question as to why an increase in conforming loan limits will benefit the consumer. It is one of the objectives of the conforming agencies to service the low-to-moderate income markets. Not to say that banks that portfolio jumbo loans are not serving that market as well. Yet, it is hard to say that jumbo loans are targeting to the low-to-moderate income market. Therefore, conforming programs provide advantages over jumbo loans in most cases:
- A lower down payment. Fannie and Freddie offer programs with a down payment as low as 3.0%, which is lower than the required down payment of FHA. Most jumbos require at least a 5.0% down payment, and certainly higher as the loan sizes increase.
- Conforming loans offer options such as renovation loans and quick recovery of equity for cash buyers.
- Though this is not always the case, conforming underwriting guidelines are often more liberal than jumbo guidelines. For example, many jumbo programs have strict DTI limits, while Fannie and Freddie borrowers can be approved with higher DTI's if they get positive results through automated underwriting systems.
This is not to say that there are not many jumbo options out there. Many non-QM
programs provide plenty of underwriting options, but they likely come at a much higher rate and larger down payment requirements. The bottom line is that higher conforming limits are good news for everyday buyers.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at email@example.com.
Why has the spread between conforming and jumbo rates narrowed?
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