High Balance Loan vs. Jumbo Loan
If you’ve ever tuned into an episode of “House Hunters,” you already know it’s possible to get a five-bedroom home in an ocean community for less than $300,000, while a studio apartment in New York City might cost $1 million or more.
What’s a potential homebuyer to do? Surely a lender isn’t about to offer the same amount in both areas, right?
Actually, that would be correct. The Federal Housing Finance Agency (FHFA) sets limits based on homes prices in each area. This means what lenders might offer in a lower-cost area is typically different than what they might offer in an area where a buyer might not be able to purchase anything for less than $500,000.
When home prices rise, the FHFA resets its limits, as it did for 2019. In most of the U.S., the maximum conforming loan limit for a single-family home is now $484,350, up from $453,100 in 2018. But in high-cost areas, the limit for a single-family home in most areas is now $726,525. The $726,525 limit now also applies to single-family homes in Alaska, Guam, Hawaii and the U.S. Virgin Islands.
Sometimes, the house you’ve found may be priced above what a lender is willing to lend based on FHA loan limits in your area. For times like these, lenders offer two options: high-balance loans and jumbo loans. Both come with different lending rules, like potentially higher interest costs, down payments and lending fees. Yet both loan types may be an option for buyers who either live in more expensive parts of the U.S — or who simply can’t afford a pricier home.
What is a high-balance mortgage loan?
Most mortgages in the U.S. are conforming loans that are based on what two large, government-sponsored entities, Fannie Mae and Freddie Mac, and willing to buy from lenders and resell to investors on Wall Street.
Fannie Mae and Freddie Mac guarantee the mortgages they sell, so they’re a stabilizing influence in the mortgage market. However, these two companies — which are actually private — also set limits on what they will buy, and these limits are first determined by the FHFA.
In 2019, the maximum conforming loan limit for high-cost areas for a one-unit home in the United States is now $726,525, and there are now high-cost areas in California, Colorado, Connecticut, the District of Columbia, Florida, Georgia, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Utah, Virginia, Washington, West Virginia and Wyoming. Limits are higher for multi-unit homes, so a three-unit home in, say, Bergen County, N.J., now has a loan limit of $1,124,475. To see what the conforming loan limits might be in your county, check this chart, or the map on the FHFA website.
A high-balance loan is basically a conforming loan that is higher than the current conforming loan limit ($484,350 this year), and no more than the $726,525 limit for high-cost areas.
High-balance loans typically come with tighter requirements than regular conforming loans. For example, interest rates also tend to be higher than for conventional loans because you’re asking for more money, so the loan carries more risk for a lender.
Still, it’s easier to get a high-balance loan now than it used to be. In the past, borrowers typically had to bring a 5% down payment to a closing if a high-balance loan had a 80% loan-to-value ratio (LTV) or more. Today, high-balance loans allow up to a 95% LTV for a fixed-rate loan, or a 90% LTV for an adjustable-rate mortgage. An LTV is a general measure of the riskiness of a loan because it compares the amount of a loan to the value of an asset like a home.
You can use a high-balance mortgage loan to buy a home, for a limited cash-out refinance, or for a cash-out refinance. They apply to either fixed-rate or adjustable-rate mortgages, and also to condominiums, cooperative apartments and manufactured homes that have between one and four units. While eligibility for a high-balance loan is subject to a minimum 620 credit score, if you have a higher credit score you may be able to get a loan that comes with a higher debt-to-income ratio.
What is a jumbo loan?
Like high-balance mortgage loans, jumbo loans are designed for those who want to make a home purchase with a loan that’s larger than the loan limit, but need to borrow even more money than what a high-balance loan can offer.
For example, if you live in Tampa, you’d normally be confined to a $484,350 loan since it’s not considered a high-cost area. But if you need a mortgage over this amount, a jumbo loan might be an option.
Unlike a standard conforming loan, a jumbo loan is a non-conforming loan. This means it’s not eligible for purchase by Fannie Mae or Freddie Mac because the amount — sometimes millions of dollars — is above the maximum loan limit. It also means you’ll have to get your jumbo loan from a large bank or qualified online lender.
Unlike a conforming loan, it’s possible to get a jumbo loan for all sorts of properties, ranging from high-rise condos to log homes, depending on the lender.
Still, before opting for a jumbo loan, know their limits. Compared to conforming loans, interest rates tend to be higher because the larger loan amounts are riskier for lenders. Also, a recent change in tax law now allows home buyers to deduct interest payments on only up to $750,000 in mortgage debt. If you were hoping to take out a large jumbo loan, you could see your tax break shrink dramatically.
Another complication: Jumbo loans are tricky for lenders to sell on the secondary mortgage market because they don’t conform to the same guidelines. So while small, conforming home loans can be bundled and sold to investors as mortgage-backed securities, jumbo mortgages take more effort, said Adam DeSanctis, a spokesman for the Mortgage Bankers Association.
Rates for jumbo loans vary widely, and frequently, so do your research, and comparison shop. Data suggests differences in jumbo loan rates are about twice as high each day as they are for conforming loans, so check lender rates carefully.
Keep in mind too that sometimes — as has been the general case for the past five years — interest rates for jumbo loans are actually slightly lower than for conforming loans. In mid-January, the average rate for a 30-year fixed jumbo mortgage was 4.53%, according to the Mortgage Bankers Association. During the same time, a 30-year fixed rate conventional mortgage was 4.74%.
It’s important to check rates for both types of mortgages before committing. It may also be worth taking two mortgages rather than taking on a single jumbo loan.
Jumbo loan eligibility
Unlike conforming loans, that have clear eligibility and underwriting guidelines, jumbo loans have fewer rules, and lenders tend to set their own. Some lenders simply want to see tax forms, while others may ask for considerable paperwork, including bank statements and other financial documents.
One lender may offer you a 90% jumbo loan that requires just 10% down, while another might only give you an 80% loan, or perhaps refuse to give you a loan for buying a condominium. In general, both credit score and down payment requirements for jumbo loans vary on a case-by-case basis.
“If [you] have high credit and a high income, it might be the same as someone getting a conventional mortgage,” DeSanctis said.
Jumbo loans versus high-balance loans
Both mortgages offer loans for relatively high-cost areas. But while a high-balance loan is a conforming loan with guidelines set by Fannie Mae and Freddie Mac, a jumbo loan is non-conforming. A conforming loan is typically easier for a lender to sell on the mortgage market, so interest rates may be lower.
For a jumbo loan, you’ll probably need a higher down payment (at least 20%), a good credit score (740 or higher) and a debt-to-income ratio of 45% or lower.
The bottom line
It’s possible to take a large loan for a more expensive home if you live in a high-cost area, but the key is to do your research, because lender terms for both high-balance and jumbo loans vary considerably. It’s also important to compare interest fees for these larger mortgages, because they’ll typically accrue more interest over the life of the loan.