Home loan limits at first glance may seem a bit confusing, especially for those preparing to buy their first home. In Arizona, whether the property is located in Phoenix, Tempe, Flagstaff or Scottsdale, the current conforming loan limit for 2020 is $510,400.
For amounts larger than $510,400, these loans are referred to as “jumbo” mortgages. A jumbo mortgage will generally have slightly higher rates compared to loans at or below $510,400 (conforming loan limit) However, what these limits do not determine how much someone can borrow. The maximum loan amount someone can qualify for is based upon gross monthly income and credit/debt obligations, not a conforming or jumbo loan limit.
Instead, these limits are used to assign interest rates for various loan programs. Lenders today use what is referred to as a Loan Level Pricing Adjustment, or LLPA, which is a grid-based on credit scores and down payments. Lenders who set interest rates for conforming loans can have higher or lower rates based upon these risk factors. Someone with a sizable down payment of 20 percent or more, with a 740 credit score will have a lower interest rate compared to someone with a 640 score and 5% down, for example.
Jumbo loan caps follow a similar model. Take for example a home in Scottsdale on the market for $1.25 million. There are jumbo loan programs that require only for a 5% down payment for loan amounts up to $2.0 million and with a 10% down payment, the loan cap is set at $3.0 million. With a conforming loan, the minimum down payment is 3% of the sales price unless someone is eligible for a VA or USDA mortgage. While many jumbo loan lenders require a down payment of 20 percent, there are 5% and 10% options available to qualified buyers nationwide. Buyers can review the latest Jumbo Purchase options here.
Conforming and Jumbo loan guidelines are very similar, although jumbo loans can have slightly tighter qualification standards. Jumbo lenders can issue their own set of jumbo lending guidelines which means one lender might ask for a 20 percent down payment while another has a program with only 5% down. Also note, eligible Veterans have special VA Jumbo financing options available to them. Read more about the VA Jumbo loan guide here.
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