A No-Nonsense Guide to the Different Types of Mortgages (Part Three)

 conforming loans and jumbo loans

In part two of our “Different Types of Mortgages” series, we talked about government-insured loans and conventional loans. The next category of mortgages is based on size: do you need a jumbo loan or a conforming loan?

Jumbo Loans vs. Conforming Loans

Jumbo loans and conforming loans refer to the size of the loan you’re taking out. Conforming loans “conform” to loan amount guidelines set by Fannie Mae and Freddie Mac. These are set each year by the Office of Federal Housing Enterprise Oversight (OFHEO) and vary based on location.

In essence, if your mortgage is a conforming loan, this means that Fannie and Freddie are willing to purchase it. In comparison, jumbo loans are loans that exceed the conforming limit. They won’t be purchased by Fannie Mae and Freddie Mac. While jumbo loans can certainly get you a more expensive home, it’s smart to understand their costs and benefits before deciding to take one out.

Conforming Loans

Right now, the conforming loan limit for single-family homes in most of the continental United States is $453,100. In certain areas of the U.S., such as New York City and Los Angeles, loan limits can be significantly higher.

In comparison, in areas like Alaska, Hawaii, Guam & the U.S. Virgin Islands, the conforming loan limit is set at $679,650. Beyond that, in some of these areas, the conforming loan limit rises even higher.

The best way to determine the conforming loan limit in your area is to search your location at the Federal Housing Finance Agency’s website.

Jumbo and Super-Jumbo Loans

Now, where do you find a jumbo loan? Though these aren’t backed by Fannie or Freddie, you can still find them at most major banks and credit unions.

In many cases, jumbo loans come with higher interest rates than conventional loans, due to the extra risk that the lender is taking on by issuing a larger loan. Taking out a jumbo loan will also require:

  • A high, steady income.

  • A well-documented financial history.

  • A particularly high credit score (660 or above in most cases).

  • A larger down payment.

  • At least six months’ worth of mortgage payments in escrow.

While jumbo loans are certainly larger than conforming loans, they aren’t the largest loans out there. In fact, some of them can look quite small when compared to their larger siblings: super jumbo loans.

The exact definition of “super jumbo” varies from lender to lender. In many cases, these loans are defined as any mortgages that range between $650,000 and $5 million. Some lenders will go beyond that, offering super jumbos of $10 million or more, but those are pretty far out of the reach of the average homebuyer (and the average millionaire, for that matter!).

Up Next: Part Four of the Different Types of Mortgages: Purchase Loans vs. Refinancing and Home Equity Options