What does “conforming” and “jumbo” mean when it comes to loan amounts?

Conforming loan amounts are loan amounts under $417,000 (as of 2007).

This number is set by Fannie Mae at the end of each year. (The limit back in 1980 when this standard was set by the US Government was $93,750).

If a lender wants to be able to easily sell the loan on the secondary market, they have to keep the loan amount under the conforming limit of $417,000.

If a loan is above $417,000 it's called a "jumbo" loan. The jumbo loan rates are usually a bit higher than conforming loan rates.

Because of the recent news about jumbo rates rising, we expect many lenders to get creative with their splits between jumbo and non-jumbo loans. For example, here was how a deal may have been done previously:

Buyer is purchasing a $600,000 house. They want to put 5% ($30k) down. Therefore, the total loan amount is $570,000. Since the buyer wants to avoid private mortgage insurance, they do what's called an "80/15/5" so their first trust (primary loan) is $480,000, the second trust loan is$90,000, and the buyer's cash input is $30,000. The rate on the first trust was 6.5%, and the second trust was 8%.

However, recently, jumbo rates have gone up. That first trust at 6.5% may now be at 8% (you can read why that's happening here). Therefore, the best thing to do is to lower the first trust to$417,000 so it becomes a conforming loan. The new structure may look like this:

Buyer is purchasing a $600,000 house. They put 5% down. They get a first trust of $417,000 at 6.5% and a second trust of $153,000 at 8%. By keeping the first trust at $417,000, the buyer is able to get a much lower rate in today's market.

But the buyer now has a second trust at a higher rate. What we recommend the buyer does in this situation is get an interest-only loan on their first trust, and then pay down their second trust instead of paying down the first trust. By doing this, the buyer will pay down their higher loan sooner.