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The Rules for Jumbo Mortgages Are Changing: What It Means for You

Scott Sheldon

Last month, the Federal Housing Finance Agency unveiled the new 2016 loan limits. These limits effectively determine which loans can be bought, backed and resold to secondary markets by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac.

Thirty-nine high-cost counties raised their limits on conforming high balance loans, indicating the GSEs have a reinvigorated appetite for lucrative mortgage-backed securities. The move also has implications for consumers. Namely, it means borrowers in certain areas may have an easier time securing larger home loans. Here's what you need to know about the changes.

Breaking Down the Mortgage Categories

When you apply for a mortgage to buy or refinance a home, your loan size falls into one of three categories: conforming, conforming high or jumbo. Your loan type is completely separate and independent of your mortgage loan program. The amount of money you plan to borrow establishes the framework of how your loan will be structured.

Conforming loans are loans that adhere to Fannie Mae and Freddie Mac's guidelines. They generally include loan amounts up to $417,000 in the broader U.S. Loans up to $417,00 have the most flexible and lenient equity requirements when looking strictly at a conventional mortgage — that is, a mortgage not insured by the Federal Housing Administration,.

Conforming high balance loans or super-conforming loans are loans greater than $417,000 but no higher than the maximum county loan limit where the subject property is located.

Conforming high balance limits are the subject of the recent changes to loan limits unveiled by the FHFA. For example,in Sonoma County, Calif., the maximum county high-cost loan limit is $520,950 through the end of 2015. In 2016, the new County of Sonoma loan limit will be $554,300, effectively giving mortgage applicants $33,350 more in borrowing ability under conforming mortgage guidelines.

Jumbo loans are loans that exceed the county maximum loan limit. For instance, in San Francisco, the maximum county conforming loan limit is $625,500.Any loan size over this amount is automatically considered a jumbo loan.

Jumbo loans traditionally have tighter credit and equity guidelines than conventional loans, but lately have featured aggressive interest rates. The rate increase can be attributed to a more exuberant economy beginning to take shape.

How the Changes Could Affect Borrowers

Mortgage applicants opting to avoid more pricey FHA loans (due to the required private mortgage insurance for low-down-payment loans) can still apply for a mortgage with as little as 5% equity. There is a 3% down conventional program, but the program does have income limitations. So, for illustrative purposes, 5% is considered the norm for loan amounts up to $417,000.

But with a conforming high balance loan in Sonoma County, should the size of the loan be greater than $417,000, a consumer can refinance or purchase a home with as little as 10% equity for a loan value up to $554,300. The borrower would also have more flexibility in terms of their credit score and other underwriting requirements than they would on a jumbo loan. (You can see where your credit stands by viewing your credit scores for free each month on Credit.com.)

Additionally, borrowers looking to finance a rental property or a second home could also benefit from the loan limit increases. While the requirement for a down payment for a second home generally remains at 10% of your purchase price, a consumer will be able to finance more in 2016 than at current levels.

The same logic applies for a rental property. The down payment requirement is still generally 20% (some lenders may only require 15%). However, in 2016, borrowers will have the advantage of financing a larger loan size while remaining under the hub of Fannie Mae and Freddie Mac.

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