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What's the difference between jumbo and conforming loans?

A jumbo loan is bigger than a conforming loan, so if you need to borrow more than $726,525, you’ll be pushed into this bracket. 

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If you’re apartment shopping in New York City and you need to get a mortgage in order pull off your housing goals, you’ve probably come across the terms "jumbo loan" and "conforming loan." 

Confused about what they are or which one you need? Here are some of the distinctions between the two types. 

A jumbo loan is bigger than a conforming loan (more on that below) and isn’t backed by any government institutions. As with any financial product, factors that affect the risk also affect the rate but in this case, rates for jumbo loans aren’t always significantly higher than conforming loans. 

Of course, the high cost of housing in NYC means banks are very familiar with jumbo loans.

A conforming loan is one that can be acquired by Fannie Mae and Freddie Mac, the government-backed agencies that provide funds to thousands of banks to finance housing. (Fannie and Freddie buy mortgages and either hold them or package them into mortgage-backed securities.) 

How to know if you need a jumbo or a conforming loan

Conforming loans are capped by the Federal Housing Finance Agency and in NYC, the ceiling loan limit for one-unit properties is currently $726,525

A jumbo loan is, unsurprisingly, bigger than a conforming loan, so if you need to borrow more than $726,525 you’ll be pushed into this bracket. 

“Since they cannot be sold to Fannie Mae, [jumbo loans] depend on the lender or financial institution or rate, term, and other requirements,” says Robbie Gendels, senior loan officer at National Cooperative Bank (a Brick Underground sponsor)

Difference in rates

The current rate on a 30-year fixed mortgage is 3.73 percent, according to Bankrate. The rate increases to 4.12 percent for a 30-year fixed jumbo loan

"Right now rates are very low even for a jumbo loan. At times some lenders may charge a slightly higher rate but this may depend on the market at the time," says Gendels

Some banks won't offer long-term fixed rates for jumbo loans. Instead, they'll offer an adjustable rate or portfolio loan. The rate for this loan can, in some cases, be lower than a conforming rate but is subject to change.

Consequently, you're more likely to find a broader range of product offerings (in terms of rate, type, and time length) if you are taking out a conforming loan.

Loan-to-value ratio

The amount of money you can borrow against the sales price of your new digs is called the loan-to-value (LTV) ratio. With a conforming loan, you can borrow up to 95 percent of the cost of an apartment (but keep in mind, when you are buying a New York City co-op or a condo, you will have to put down at least 10 percent of the cost of a condo, and typically 20 percent for a co-op, and sometimes more.)

When you take out a jumbo loan you can only borrow 80 percent of the cost of the apartment.

Gendels says, with jumbo loans, "lenders may ask that you put up a larger down payment and reduce the LTV to 70-75 percent."

Other credit requirements

Most banks require you to have some funds in reserve when you take out a mortgage. The amount varies depending on whether you take out a conforming or a jumbo loan. 

"Some lenders may require six months of the mortgage payment, interest, taxes, and insurance [for a jumbo loan] versus the typical two months' worth for a conforming loan," says Gendels.