Lending options to combat rising rates, escalating home prices

According to Zillow, the average price of a home in the United States is expected to top $375,000 in 2022. In several regions of the country, prices of homes are significantly higher, which means buyers require larger loan amounts to finance their purchases.

Depending on the asking price, buyers with good credit and payment histories may consider Conventional or Jumbo loans to purchase their home. Both loan types require homeowners to meet certain eligibility requirements including minimum credit scores, income thresholds, repayment ability, and down payments. Furthermore, each type is also issued and underwritten by lenders in the private sector. Though they may serve the same purpose — to secure a property — these products have several key differences that need to be considered.

Conventional loans

Conventional mortgages are any mortgages that are not backed by the federal government; typically, private lenders such as banks, mortgage companies, and credit unions offer them as either conforming or non-conforming. Conforming loans adhere to Fannie Mae and Freddie Mac’s strict underwriting guidelines and the Federal Housing Finance Agency’s size limits. However, a non-conforming loan is one that does not meet the guidelines established by Government Sponsored Enterprises (GSEs). 

The FHFA annually sets the maximum limits for conforming conventional loans to keep pace with increasing home prices, and it was increased in early 2022 for single-unit dwellings to $647,200. However, the agency recognizes that some areas are more expensive and has designated up to 200 U.S. counties this year for loan limits up to $970,800.

Naturally, these conforming conventional loan limits determine how much a client can borrow on the purchase of a home; but once the purchase price exceeds the loan limits, borrowers need to find alternatives. A major advantage of Conventional loans is low down payments, but they come with additional costs in the form of mortgage insurance – which can be paid upfront or in monthly premiums — to offset the risks lenders face should borrowers with LTVs over 80% default.