Conventional and jumbo remain great solutions for good credit clients
Despite the recent rise in mortgage rates, strong demand and tight inventories continue to fuel a rise in home prices that require lending solutions with higher loan amounts. Although non-QM loans can offer larger loan amounts to cover these areas, for those borrowers with good credit and payment histories, Conventional and Jumbo loans will normally offer lower rates – a key deciding factor, even more so as rates keep fluctuating.
The affordability issue
According to the S&P CoreLogic Case Shiller index, home prices across the nation rose nearly 20% in February compared to February 2021 and there is no sign yet of prices abating. Phoenix, Tampa, and Miami had the highest annual price increases, at 32.6%, 30.8%, and 28.1%, respectively, and 16 of the 20 cities in the S&P CoreLogic national survey registered higher prices year over year.
According to Zillow, the average price of a home in the United States is expected to top $375,000 in 2022. In several regions of the country, prices of homes are significantly higher, which means buyers require larger loan amounts to finance their purchases.
Depending on the asking price, buyers with good credit and payment histories may consider Conventional or Jumbo loans to purchase their home. Both loan types require homeowners to meet certain eligibility requirements including minimum credit scores, income thresholds, repayment ability, and down payments. Furthermore, each type is also issued and underwritten by lenders in the private sector. Though they may serve the same purpose — to secure a property — these products have several key differences that need to be considered.
Conventional mortgages are any mortgages that are not backed by the federal government; typically, private lenders such as banks, mortgage companies, and credit unions offer them as either conforming or non-conforming. Conforming loans adhere to Fannie Mae and Freddie Mac’s strict underwriting guidelines and the Federal Housing Finance Agency’s size limits. However, a non-conforming loan is one that does not meet the guidelines established by Government Sponsored Enterprises (GSEs).
The FHFA annually sets the maximum limits for conforming conventional loans to keep pace with increasing home prices, and it was increased in early 2022 for single-unit dwellings to $647,200. However, the agency recognizes that some areas are more expensive and has designated up to 200 U.S. counties this year for loan limits up to $970,800.
Naturally, these conforming conventional loan limits determine how much a client can borrow on the purchase of a home; but once the purchase price exceeds the loan limits, borrowers need to find alternatives. A major advantage of Conventional loans is low down payments, but they come with additional costs in the form of mortgage insurance – which can be paid upfront or in monthly premiums -- to offset the risks lenders face should borrowers with LTVs over 80% default.
Typically, borrowers must have the following to qualify for conforming loans:
- Fair Credit – A minimum FICO of 620 is expected
- DTI Ratio – A Debt-to-Income ratio between 43% and 45%, but some lenders can go up to 50%
- Down Payment – At least 3% or up to 20% of the home’s value
- Cash Reserves Needed – Up to 6 months to cover homeowners’ expenses
Jumbo mortgages are essentially loans intended for pricier properties. These loans typically involve big sums – starting around $650,000 and often running into the millions. Luxury homes found in highly competitive real estate markets are generally financed via jumbo mortgages.
Jumbo loans are non-conforming, thus falling outside of FHFA’s restrictions on loan sizes, geography, or property values. This is significant because, as a result, jumbo loans are precluded from receiving financial backing by Fannie Mae or Freddie Mac. Jumbo loans also don’t require mortgage insurance if the LTVs exceed 80%.
Typically, all conforming loans can be packaged and sold to either Fannie Mae or Freddie Mac. In doing so, the risk to the lender is reduced with a guarantee form the agencies. However, non-conforming loans cannot be sold to those federal agencies and therefore, a lender’s risk is increased, and that increased risk will be reflected in the terms of the loan.
In order to qualify for a jumbo loan, borrowers typically must have:
- Excellent Credit – A minimum FICO score of 700
- DTI Ratio – 36-43%
- Down Payment – 10-20%
- Cash Reserves Needed - Up to 12 months’ of homeownership expenses
- Maximum Loan-to-Value Ratio – 90% or less
A&D Mortgage loan programs
As a Direct Lender, A&D Mortgage offers a wide range of Conventional, Jumbo, and high-limit non-QM loan options to service those borrowers who have good credit and payment histories looking for more expensive homes or real-estate investments. Great pricing, easy-to-use technology, fast turn times and knowledgeable teams who provide superior service are all factors that clients and brokers should consider when selecting a Conventional or Jumbo lender – all of which A&D possesses.
For more information about A&D Mortgage, visit www.admortgage.com.