When is a jumbo loan a jumbo loan? Well, today a jumbo loan in most parts of the country is any loan amount above the new conforming loan limit of $424,100. This new conforming limit took effect January 1 of this year. Just this past December, the conforming loan limit was $417,000. This increase was the first such increase in the conforming loan limit, and thus the new minimum jumbo amount of $424,200. There is also another class of conforming loans, those underwritten to Fannie Mae and Freddie Mac guidelines, called “High-Cost” loans which increases the conforming loan in areas deemed so because the median home loan value in these areas are much higher compared to the rest of the country. Most of these loan limits increased from $625,500 to $635,150 for single-family dwellings in select locations of Florida, California, DC, and other high-cost areas.
Okay, so if the jumbo loan limit is anything greater than the conforming loan amount, what moves the conforming loan limit? There actually is a method used and defined in the original Homeowner Equity Recovery Act of 2008, or HERA. HERA requires the Federal Housing Finance Agency, or FHFA- sorry for all the acronyms but we are talking about government agencies here- that compares the Q3 national average home value with the previous Q3 number. From Q3 2015 to Q3 2016, there was an increase of 1.7% year over year. That increased the conforming loan limit to $424,100 but remember it took 10 years to get to this level.
In 2005, the conforming loan limit was $356,600 with the increase jumping to $417,000 where it remained for a decade. You recall that housing values approached a bubble in most areas and as home values increased overall, so too did the jumbo limit. The difference between $417,000 and $356,600 is $60,400. The most recent change was just $7,100. In 1991 the conforming loan limit was $191,250 and the following year $202,300. These levels are just half of the conforming loan limits we see today.
Jumbo loans have historically carried slightly higher interest rates when compared to conforming loan. Home buyers who are financing a loan in the jumbo price range can decide to structure their loan in two parts in order to keep the loan right at or just below the conforming loan limit and having access to the lower interest rates.
For example, let’s say there is a home for sale at $600,000 Atlanta GA. If the buyers decided to take out two mortgages, the first at the maximum conforming limit of $424,100 and a second, subordinate loan amount of $115,900. This requires just a $60,000 down payment as the two loans add up to $540,000. The second lien will always have a slightly higher rate but the benefit having two mortgages is the second loan can be paid off earlier and does not have to exist throughout the entire loan term as the second lien has no prepayment penalty. These combo loan or "piggyback" loan structure are a very popular choice for buyers opting for 10% or even 5% down payment.
If we do see an increase in home values in 2017 we can also expect the jumbo loan amount to increase as well in 2018. That’s actually good news for sellers as well as buyers. It’s obvious that sellers want to get the most they can when they sell their home and while buyers will be subject to higher prices the increase in home values is also an indicator the economy overall is continuing to improve. Low unemployment and higher wage gains are direct results of a healthy economy. When home values are on the rise and real estate is moving at a healthy pace, conforming as well as jumbo loan limits will move right along with them. Buyers can learn more about all the latest Jumbo purchase options here.