Do you know your mortgage type?
If the plural of tooth is teeth, why isn’t the plural of booth, beeth? One goose, two geese. So one moose, two meese? Doesn’t it seem crazy that you can make amends but not one amend? If you have a bunch of odds and ends and get rid of all but one of them, what do you call it? Likewise, figuring out which mortgage program you qualify for can be just as twisted. Let me shed some light on many of the common terms you may hear as you embark on the mortgage process.
Making Sense of the Dollars
Every mortgage program has dollar limits as to how big of a loan that specific program is eligible to fund. Loan limits are designed to provide protection against artificial inflation in the housing market that could arise from un-regulation. The limits are dependent on several factors, such as type of mortgage (e.g. “conventional,” “government,” “jumbo,” etc.), geographic location of the subject property, and loan-to-value.
The Average Bear
Conventional mortgages AKA “Conventional” or “conforming” loans refer to mortgages that are funded by lenders using underwriting guidelines established by Fannie Mae or Freddie Mac, who then sell the loans to Fannie or Freddie, who then package the loans into bundles and sell them as investments called Mortgage Backed Securities (MBS).In most counties across the county, the 2020 maximum conforming loan limit for a single-family home will be $510,400. As long as the loans meet underwriting guidelines and fall within the established loan limits, they are eligible to be purchased by either entity depending which guidelines were used for approving and funding the mortgages. The conforming loan limits are reviewed and set annually by the Federal Housing Finance Agency (FHFA) based on the percentage increase, or decrease, in the average housing price. The list varies by the number of living units included within a single property, and general and high-cost area loan limits vary by geographic regions.
You’re High Maintenance
Following the housing and mortgage markets melt-down starting in 2008 a “high-balance” loan limit was established for high cost areas across the United States. This enabled home buyers and owners in areas such as Los Angeles or Boston, where the median home price is higher than the conforming loan limit, to have easier access to low rate mortgages supported by Fannie and Freddie’s funding guidelines. The high-balance loans have higher rates and pricing than standard conforming loans, as well as stricter underwriting guidelines. For 2020 the conforming loan limit nationwide is $510,400. The high balance loan limits vary by county with the maximum being $765,600, which is the maximum limit for Los Angeles, Orange and several counties in Northern California. Note that these are the limits for single family residences, there are different loan limits for two-, three-, and four- unit properties.
You’re Special, For Good Reason
Government Loans, loans that are insured by either the Veterans Administration (VA) or the Federal Housing Authority (FHA) have separate underwriting guidelines. VA loans are unique in that there is no limit on loan amounts based on location or imposed by the VA, but rather a limit to the amount of the entitlement the veteran has from the VA, his/her ability to qualify, and what, if any, down payment or equity exists in the property. FHA has loan limits by county, ranging from $331,760 in Tulare County to $765,600 in Orange County.
Go Big, and Go Home
Non-conforming loans, generally labelled as “jumbo” mortgages, are those loans that are funded outside of conventional or government channels have many different programs, and therefore limits and underwriting guidelines. Non-conforming mortgage programs are funded by lenders and then sold to specific investors who establish the guidelines for underwriting and funding the mortgages. There are hundreds of different such investors who purchase mortgages from lenders, from major brokerage houses, to equity firms, to insurance companies, to regional banks.
A Coin Toss
For borrowers whose loan amount qualifies for both a jumbo loan and a high-balance conforming one, the decision comes down to rates offered and the qualifying guidelines. Most non-conforming loan limits are based on loan to value limits. For instance, a lender may go to 90% LTV to $1,000,000; 80% to $1.5 million, 75% to $2 million and 70% LTV to $2.5 million. Another lender may not lend above 80% LTV but at that limit lend to $2 million.
Clients should be reminded that the loan amount, loan to value, and very importantly their ability to qualify, are factors as we determine loan product options and what rates and costs are associated with those options.