This information is easiest to explain through an actual experience with one of my customers…
I just recently got a call from a past customer of mine. He desperately needed to move because he was bringing his office in-house and wanted a “hang-out” space for his teenage kids and their friends. He was looking for a home in the $600,000 price range and planned to use the proceeds from the sale of his existing home for down payment. When we completed the application and credit check I was reminded of how we financed his last home. He had some past issues on credit – a bankruptcy about six years ago that included a mortgage.
Conventional loans have some strict timing requirements (download the quick reference chart) for post-bankruptcy and foreclosure. Bankruptcies require a waiting period of four years. When a mortgage is included in a bankruptcy we consider that to be a foreclosure which has a seven year waiting period! But, Fannie Mae has an exception allowing just a four year waiting period when a mortgage does not go to foreclosure on its own but is instead included in a bankruptcy. This is how we qualified him for a refinance a couple of years back. This time he was looking in a much higher price point which would require us to go with a jumbo loan that did not allow this exception which would require him to wait another year before he could qualify. Now what?
Fannie Mae and Freddie Mac are restricted by law to purchasing single-family mortgages with origination balances below a specific amount, known as the ‘conforming loan limit.’ Loans above this limit are known as jumbo loans.
There you have it. Any loans that exceed the loan limits set by the FHFA are considered jumbos. If it were only that easy! See, there are exceptions (yep, another exception). That’s just the way the mortgage business is. I think they do this to keep us all on our toes. Denver is considered a “high-cost” area, which I am guessing is no surprise to you! Being in a high-cost area expands the normal, or conforming loan limit of $417,000 in Denver Metro (Adams, Arapahoe, Broomfield, Denver, Douglas, Jefferson counties) to $458,850 (called “super-conforming”) while still being able to follow the normal Fannie Mae or Freddie Mac guidelines, which was perfect for this customer!
Using a super-conforming loan we qualified this customer to a loan amount of $458,850 and a purchase price of $600,000 with the down payment coming from the sale of his home. With this same down payment amount, if we had to stay within conforming loan limits of $417,000, he would have been limited to a $558,000 purchase price. The only negative with super-conforming is that there is a negative hit to rate.
For many customers, this is where jumbo financing would come back into play. If we have a customer who can qualify for jumbo and has 10%+ to put down, they may be able to get a better rate using jumbo financing than the super-conforming conventional loan. When we are deciding between a super-conforming loan or a jumbo loan we will turn to qualifications, credit score and down payment to determine which option is best for that particular customer.
Whew, this was a long one! Thanks for sticking with me. I share this story with you because it shows the various situations we encounter and how we need to be flexible when finding solutions for our customers. We approach every qualifying situation with a wide range of possibilities eliminating options slowly to ensure we end up with the best possible solution for each customer’s situation.
Who do you know that could benefit from this approach to qualifying and dedication to finding the right mortgage option?