'Jumbo-conforming' rules could trip up homeowners
By Holden Lewis • Bankrate.com

You might be disappointed if you planned to refinance your mortgage under the new "jumbo-conforming" limits. The requirements are stringent, and they might leave some would-be borrowers out.

Homeowners who wanted to pay off their home-equity debt by doing a cash-out refinance are out of luck. Under Fannie Mae's guidelines, they won't be able to do that. That's the requirement that will trip up the most borrowers who wanted to take advantage of the temporarily higher jumbo-conforming limits in expensive areas.

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Mortgages are divided into two types, depending on the loan amount. Until this month, a mortgage of $417,000 or less was a conforming loan, and a mortgage greater than that was a jumbo loan. Rates on jumbo mortgages are about a percentage point higher than rates on conforming loans.

The federal government has raised the loan limit in a few hundred counties where the houses are expensive. The goal is to allow people in high-cost areas to refinance at rates that are lower than those for jumbo loans. Now, instead of having one conforming limit across the country, there is a $417,000 conforming limit in most of the country, and varying "jumbo-conforming" limits in expensive areas.

Depending on the median cost of houses in each metro area, the jumbo-conforming limit can be as high as $729,750. You can look up your county's limit on this clickable map.

"These provide a tremendous opportunity for many people who previously could not have refinanced," says Nicholas Bratsafolis, chairman of New York-based Refinance.com. Lenders aren't quoting rates on these jumbo-conforming loans yet. Bratsafolis expects lenders to come out with rate sheets on these mortgages before the Ides of March.

Under Fannie Mae's guidelines:

• Jumbo-conforming mortgages have rather strict loan-to-value limits. If you're getting a loan to buy your principal home, you can't borrow more than 90 percent of the home's value if you get a fixed-rate loan, and you can't borrow more than 80 percent of the home's value if you get an adjustable-rate loan.

If you're refinancing, you can't get a first-lien mortgage of more than 75 percent of the home's appraised value. The combined amount of all mortgages, including home-equity debt, can't exceed 95 percent of the appraised value. These loan-to-value ratios for refinances apply to both fixed-rate and adjustable-rate loans.

• You can do only a "limited cash-out refinance," which means that you can borrow a little bit more than your current balance, but only to pay closing costs or borrow a round number (i.e., borrow $530,000 instead of $528,838). You can't do a cash-out refi to pay off a home-equity loan or home-equity line of credit, or to walk away from the closing table with a check for more than $2,000.
• You have to have a credit score of 660 or higher. If you're getting the loan to buy a house, and you're borrowing more than 80 percent of the home's price, the minimum credit score is 700.
• For second homes and investment properties, the maximum loan-to-value is 60 percent, and the minimum credit score is 660.
• It has to be a one-unit property. That includes a single-family house, of course, and it also includes condominium units. It excludes duplexes and triplexes where the owner rents out the other units.
• Because you can't get a cash-out refi to pay off home-equity debt, the second-lien holder has to sign off on the refinance and agree to remain in the second lien position.

  Dick Lepre, senior loan consultant with Residential Pacific Mortgage in San Francisco, says this requirement will complicate things for about one-third of the borrowers who have already applied with him, hoping to get jumbo-conforming loans. The problem is that if the rates on the new jumbo-conforming loans aren't low enough, it won't make financial sense for these people to refinance.

  Other homeowners might face a different problem. Some home-equity lenders, most prominently National City Mortgage, are refusing to agree to remain in the second-lien position, forcing borrowers to either pay off their home-equity debt or forgo refinancing.

• You can't have had any late mortgage payments in the last 12 months. A late payment is defined as 30 days or more late.
• The debt-to-income ratio is capped at 45 percent. That means if you have a gross income of $200,000 a year, the total debt payments can't exceed 45 percent of that, or $90,000. All ARMs are qualified based on the fully indexed rate.
• Your life has to be an open book. You have to permit an appraisal with interior and exterior inspections, and fully document your income and assets.
• If the loan-to-value exceeds 80 percent, you have to buy mortgage insurance.
• You can't get a construction-to-permanent loan under the jumbo-conforming amount.

There is no guarantee that the rates on jumbo-conforming loans will be low enough to attract a lot of borrowers. Rates will be set by the market. The most likely outcome is that the rates on the jumbo-conforming loans will end up somewhere between those for conforming loans and those for jumbo loans.

In the most recent Bankrate.com survey of mortgage rates, conducted March 5, the average rate on a conforming 30-year fixed was 6.32 percent. The average rate on a jumbo 30-year fixed was 7.43 percent.