May 27, 2019
To Orion’s brokers, this is second nature. The main difference between a conforming and a jumbo loan is simply the loan amount. Conforming loans are labeled conforming because they conform to guidelines set by Fannie Mae or Freddie Mac. For most parts of the country the maximum loan amount to still be considered a conforming loan is $484,350, and in many areas where Orion lends it is $726,525. Anything beyond that is a jumbo loan. But Orion’s experienced brokers know that there are also some important differences between the two categories and they take the time to explain them to their clients.
Orion’s clients also know that jumbo rates can actually be less than Freddie and Fannie rates. There are no Agency gfees, which are currently +/- 52 basis points. Most of these loans are going into a large bank’s portfolio, and independent mortgage banks are having trouble competing with the big banks in terms of product and pricing.
Another difference involves the private mortgage insurance industry, or PMI. Any conforming loan above 80 percent would require PMI. Yet there is no PMI for jumbo loans. This caps the loan amount at 80 percent of the sales price.
Approval guidelines for jumbo loans are generally a bit more stringent. For most conforming loan programs, the minimum credit score can range from 600 to 620. For jumbo loans, the minimum credit score can be somewhere closer to 700 to 740.
Debt-ratios, expressed as a percentage of gross monthly income, can be as high as 50% for a conforming loan. Jumbo guidelines like to see debt ratios closer to 43%.
Cash reserves are generally more restrictive with jumbo loans, and our brokers know that there is a good reason for this. Cash reserves in the mortgage industry counts how many months of mortgage payments are left in the bank after all bills are paid each month. Expressed as the number of months required, a conforming loan might want to see three months’ worth of house payments in the bank. Jumbo loans on the other hand can require anywhere from six to twelve months of reserves left in the bank after the buyers have made their down payment and paid for associated closing costs.
Also note that different lenders can add additional qualifying guidelines, referred to as “overlays.” This means one jumbo lender might want to see a 720 minimum credit score while another would prefer 740. If the lender applies the additional guidelines equally for all loan applicants, the lender has the prerogative to do so.