One type of home loan has become cheaper than others as rates spike. Here’s what it means for Bay Area real estate

One type of home loan has become cheaper than others as rates spike. Here’s what it means for Bay Area real estate

As if buying a home wasn’t tough enough, the recent surge in mortgage rates is making it even harder, especially for buyers who need conforming loans, which have shot up faster than rates on larger “jumbo” loans this year.

Historically, rates on conforming loans — which are guaranteed by Fannie Mae and Freddie Mac but can’t exceed a certain amount just under $1 million in most Bay Area counties — were about the same or lower than rates on jumbo loans over that limit. But in recent weeks, they’ve been higher by an unusually high margin — one-half to almost 1 percentage point.

The widening gap is a stark example of the squeeze that high housing prices and rising mortgage rates are putting on average home buyers, especially those entering the market.

“The conforming-loan buyers are usually first-time home buyers and they are really stretching to get into the market,” said Jim Wahlberg, a Compass agent in Danville. The rate hike “is often pricing them out of the market, because of the monthly cost.”

At the end of last year, the average rates on 30-year fixed-rate conforming and jumbo loans were about even — 3.33% and 3.31%, respectively. By the week ending May 6, the averages had jumped to 5.53% for conforming but only 5.08% for jumbos, according to the Mortgage Bankers Association.

On a $600,000 conforming loan, the difference between 3.33% and 5.53% adds $780 to a monthly mortgage payment. On a $1 million jumbo, the difference between 3.31% and 5.08% adds $1,032.

The recent surge in mortgage rates is making it even harder for home buyers, especially for those needing conforming loans, which have shot up faster than rates on larger “jumbo” loans.

Yalonda M. James/The Chronicle 2021

Conforming loans must meet the federal underwriting guidelines of Fannie Mae and Freddie Mac. The standard dollar limit for a one-unit home this year is $647,200 in most parts of the country, but it can be up to 50% higher in high-cost areas. It’s at the max — $970,800 — in all Bay Area counties except Sonoma (where it’s $764,750), Napa ($897,000) and Solano ($647,200).

Jumbo loans are those that exceed Fannie/Freddie limits. Each lender sets its own rules for jumbos, but they typically require borrowers to have larger down payments and stronger financial profiles than needed for conforming loans. About 17% of all purchase and refinance mortgage rate locks in April were for non-conforming loans, mostly jumbos, according to Black Knight.

Colin Booth and his wife started looking for a home in Contra Costa County in September, when they were quoted rates under 3%. With two young boys, they started out targeting four-bedroom homes under $975,000 in Martinez and Pleasant Hill. After getting outbid multiple times, they offered as much as $1.2 million on one home. As home prices and interest rates marched upward, they revised their search to three-bedroom homes, then to neighboring Solano County.

They lucked into a four-bedroom home in Benicia where the owner was willing to sell for $875,000 after a previous deal fell through. They borrowed $743,750, which is higher than the maximum conforming-loan amount in Solano County, but they were able to lock in a jumbo rate of 4.625% in mid-April. Their mortgage broker “was saying jumbo was more advantageous even though it typically doesn’t work that way,” Booth said. They closed on Friday.

The spurt in mortgage rates is causing some buyers to look for cheaper houses or neighborhoods, switch from fixed- to adjustable-rate mortgages or move to the sidelines, according to local real estate and mortgage professionals. “Two clients this past week put the brakes on,” said Dawn Thomas, a Compass agent in Los Gatos.

A subset of conforming loans, that fall between the standard and high-cost limit for a county, are called high-balance conforming loans. They’re fairly common in the Bay Area, where the median price was $1.2 million for a single-family home and $775,000 for a condo in March.

High-balance conforming loans are still guaranteed by Fannie or Freddie and must meet their rules. Normally, their rates are higher than standard conforming loans (up to $647,200) but lower than jumbos. Today they’re higher than both, in some cases by nearly 1 percentage point.

One reason they’re higher: Earlier this year, Fannie and Freddie began imposing new fees on second-home mortgages and most high-balance conforming loans. The fees vary, but for most borrowers with loan-to-value ratios of 80% and above, they “would be roughly equivalent” to adding 0.25% to the loan rate, said Keith Gumbinger, a vice president with mortgage tracker

On Thursday, four Bay Area mortgage brokers quoted rates ranging from 5.125% to 5.375% for a standard conforming loan, 5.5% to 5.875% for a high-balance conforming loan and 4.75% to 5% for a jumbo loan. (These were their best rates for loans with 20% down and no points, a type of loan-origination fee. Rates change frequently and vary depending on home type, use and location, points, down payment and borrower profile.)

Some Bay Area borrowers needing a loan in the high six figures could save a little money by getting a jumbo instead of a high-balance conforming loan, but only if they can meet the stiffer jumbo requirements.

These rules vary, but the best jumbo loans generally demand at least 20% down, six to 12 months’ worth of monthly payments in reserves (cash or investments), a credit score of at least 680 to 700 and a total-debt-to-income ratio no higher than 43% or 45%.

By comparison, Fannie and Freddie will back loans with as little as 3% or 5% down for a primary residence, a 620 minimum credit score and a debt-to-income ratio up to almost 50%. They generally don’t require reserves.

After getting outbid on eight homes, Conery and Traci Wilbanks finally were able to buy a home in Oakland’s Maxwell Park neighborhood for $905,000 in April. They put down 20% and borrowed $724,000. Instead of getting a high-balance conforming loan, their mortgage broker — Zach Griffin of Guaranteed Rate Affinity in Berkeley — qualified them for a jumbo loan. They locked in a rate of 4% in March; at that time a high-balance conforming rate would have been about 4.75%, Griffin said.

Jay Voorhees, owner of in Walnut Creek, said only about half of his Bay Area clients borrowing between $647,200 to $970,800 could qualify for a jumbo mortgage. “About half can’t, because they don’t have the cash for the reserves or the down payment or their debt ratio is too high.” His purchase-loan volume is 15% to 20% below last year.

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