Mortgage Basics

Conforming loans are underwritten to a standardized set of guidelines, apply to 1-4 unit properties and are guaranteed by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac

The Federal National Mortgage Association (Fannie Mae) was established by Congress in 1938 to facilitate residential lending. In 1970, Congress established the Federal Home Loan Mortgage Corporation (Freddie Mac) with a similar mandate. These quasi-governmental agencies insure mortgages against default which are underwritten to their requirements. They also purchase mortgages from lenders and package them into mortgage-backed securities which are sold to investors.

Lenders like to make conforming loans because they are guaranteed by Fannie Mae and Freddie Mac. This allows lenders to easily sell them after they are closed in order to replenish their funds and make new loans.

Conforming Loan Guidelines

Fannie Mae and Freddie Mac determine the underwriting guidelines for all conforming loans. Loans underwritten to these guidelines are said to “conform” to rules set by Fannie Mae and Freddie Mac. Because conforming loans are insured against default by Fannie and Freddie they often offer the lowest interest rates and most flexible guidelines.

Conforming Loan Limits

Each year the Federal Housing Finance Agency, which governs Fannie Mae and Freddie Mac, sets the conforming loan limits. The new limits are based upon housing prices the year prior. If home prices went up, so do conforming loan limit. Fannie and Freddie can insure and purchase loans up to these limits.

In high-cost markets, such as the Bay Area, Fannie Mae and Freddie Mac also insure and purchase loan amounts to limits higher than the national conforming maximums. These larger conforming limits are referred to as “High-Cost Area Loan Limits”. Loans to these maximums are called “High Balance Conforming” loans. Unlike traditional conforming loan limits, which are uniform across the nation, high balance limits vary according to housing costs in each region of the country.

High balance conforming loans have guidelines which are slightly stricter than those for national conforming loans and carry interest rates about .25% higher.

2026 Conforming Loan Limits

Conforming loan limit $832,750 Fannie Mae/Freddie Mac insure and purchase loans up to this maximum amount nationally.
High balance conforming loan limit $1,249,125 Fannie Mae/Freddie Mac can insure and purchase these larger conforming loans in the Bay Area.

A jumbo loan is just what you’d expect from the name: a bigger loan, namely one that is at least one dollar over the nationwide conforming loan limit of $806,500.

Jumbo Loans for High-Cost Areas

In the Bay Area the concept of a jumbo loan is more nuanced. Because we live in a “high-cost area” we have access to both traditional conforming and high balance conforming loans – both guaranteed by Fannie Mae and Freddie Mac.

If you are purchasing a property in the Bay Area and need to borrow more than $806,500, you have two options: use a High Balance Conforming Loan up to the current maximum of $1,209,750, or use a jumbo loan if it provides a lower rate or more suitable guidelines.

However, if you need to borrow more than $1,209,750, you’ll definitely need a jumbo loan. That’s because this loan amount exceeds the current high balance Fannie Mae and Freddie Mac conforming limit for the Bay Area.

2025 Jumbo Loan Amounts

Jumbo loan available $806,501-$1,209,750 Fannie Mae/Freddie Mac guarantee and purchase loans up to this maximum amount, or you can use a jumbo loan.
Jumbo loan required >$1,209,750 Fannie Mae/Freddie Mac cannot guarantee or purchase loans over this amount. A jumbo loan is required. 

Jumbo Loan Guidelines

Jumbo loans play by a different set of rules — they needn’t conform to Fannie Mae and Freddie Mac loan limits or underwriting guidelines. Lenders often set their own, more conservative, rules. That’s because the loan amounts are larger and require more safeguards against default, such as higher minimum credit scores, larger down payments, and lower debt-to-income ratios.

Jumbo underwriting guidelines are not standardized and can vary widely among lenders. For this reason, it’s important to work with someone like me who knows the guidelines inside out and has access to a wide range of jumbo loan lenders and products. Without a broker’s help, you may hit a wall with one lender without knowing a different jumbo lender could accommodate your situation.

If you can’t qualify for a loan using standard underwriting guidelines, an alternative mortgage could be the solution. Non-QM and private loans are examples of mortgages which use non-traditional ways to verify income.

Non-QM Loans Defined

Non-QM loans (Non-Qualified Mortgages) are for borrowers who don’t meet the strict requirements of a “qualified mortgage” (QM) as determined by the Consumer Financial Protection Bureau (CFPB). A qualified mortgage uses standard underwriting rules to confirm you have sufficient income to repay it. Non-QM loans utilize alternative ways to verify your income and therefore ability to repay a mortgage.

Types of Non-QM Loans

Asset-Based Loans

If you have significant assets but no current income (from employment or other sources) you may be able to qualify for a loan by using your assets as income. Lenders utilize a “depletion” calculation to determine monthly income by dividing your total assets (bank, brokerage, retirement accounts etc.) by a certain number of months of “continuance” to calculate your income for qualification.

For example, if you have $2 million total in your accounts the lender will divide this amount by 360 months of continuance (30 years) to arrive at $5555 as your monthly income for qualification.

Bank Statement Programs

If you are self-employed and your business earns strong revenue, but your tax returns don’t reflect it, a bank statement program could help. In lieu of tax returns, the lender will use total deposits to your business bank account as income after deducting an appropriate percentage for expenses.

For example, if you deposited $150,000 over the last 12 months to your business bank account, the lender will divide $150,000 by 12 to determine monthly income of $12,500. They will then deduct an appropriate expense percentage to calculate the amount available for qualification. If 15% is the appropriate amount for your industry, your net income for qualification would be $10,625/month.

Bank statement programs are also helpful if you’ve earned significantly more income in the current year then what’s shown on your tax returns for the previous year. Traditional underwriting guidelines require lenders to calculate self-employment income by looking at your most recent two years of tax returns and calculating the average over those two years. That means income from the current year can’t be used until you file your taxes the following year. However, if you use a bank statement program, your income from the current year will be used because the lender uses deposits to your business account and not what appears on your tax returns.

Foreign National Loans

If you want to buy property in the US but you aren’t a US citizen and do not have a Social Security number, you won’t be able to use a traditional mortgage for your purchase. If this applies to you, you can use a lending program tailored to “foreign nationals”. For national loans allow non-US tax documentation, non-US bank accounts and non-US credit reports to document your income, assets, and credit history.

One important thing to note though – if your documentation is not in English, it will need to be translated. The translation must be completed by a certified translation service. The lender will not accept a translation from you were a person not licensed to translate documents. Depending upon the amount of paperwork needed, this can be costly.

DSCR Loans

A DSCR loan, or debt service coverage ratio loan, can be used to finance a property which produces income (investment properties). The primary difference between a DSCR loan and a traditional mortgage is that traditional mortgages look to you, the borrower, for income to qualify for the loan and DSCR loans consider only income from the property for qualification.

Who can benefit from a DSCR loan?

• Real estate investors
• Foreign borrowers
• Borrowers with complicated tax situations
• Self-Employed borrowers

Why? Because for a DSCR loan lenders only require documentation specific to the property, not your paystubs, W-2s, or tax returns.

That’s helpful if you are a real estate investor who owns several properties already. Providing paperwork for those properties could be burdensome. It’s also helpful if you are self-employed and your tax returns don’t reflect enough income to qualify for your purchase. For non-US citizens, DSCR loans may be the only option because US tax returns can’t be provided.

How is a debt service coverage ratio calculated?

DSCR = NOI (monthly net operating income)/Mortgage Payment

A property’s NOI is calculated by deducting the expenses of ownership from the income the property generates. Property expenses include things like real estate taxes, insurance, repairs, and professional fees. The income of property generates is primarily from rental income.

A DSCR of 1 means that NOI from the property exactly covers the mortgage payment. Normally, lenders require a DSCR of between 1.25 and 1.5. However, some lenders will consider negative DSCR of less than 1 in exchange for higher interest rate.

Another advantage of DSCR loans is that the lender will usually consider projected rent for a unit which is currently vacant. An appraisal will be completed to determine the value and also estimate market rents for vacant units. DSCR lenders will generally accept 75% of market rent for vacant unit as income for qualification.

All loans have a rate that’s either fixed or adjustable. Rates for fixed-rate mortgages remain the same throughout the entire term of the loan, while those for adjustable-rate mortgages, or ARMs, stay fixed for only the first few years of the term and then adjust according to a formula. This initial ARM period can be as short as one month or as long as 10 years.

Fixed-Rate Mortgages

Because no one knows how long they’ll be in their home, many borrowers opt for a fixed-rate mortgage. Rates for fixed mortgages run higher than those for their adjustable-rate counterparts because they’re locked in for the life of the loan, regardless of market conditions.

Fixed-rate mortgages are available with either 15- or 30-year terms. Fifteen-year fixed loans carry a lower rate but a higher monthly payment than their 30-year counterparts, since they require a quicker repayment schedule. Conversely, 30-year fixed mortgages require higher rates and lower monthly payments, making them accessible for a greater number of borrowers. That’s why most loans are based on a 30-year term.

Adjustable-Rate Mortgages

Depending on your circumstances, an adjustable-rate mortgage may be the right choice. ARMs work well for people who plan to move or refinance with a few years. That’s because ARM rates are only fixed for the first few years of the loan. If you’re certain you won’t be in your home beyond a certain date, or you know you will refinance within a few years, it doesn’t make sense to take on the higher rate for a fixed-rate mortgage.

It’s worth noting that even though adjustable-rate mortgages are at lower rates than fixed-rate loans, qualifying for an ARM will not necessarily allow you to borrow more. That’s because lenders require that you be qualified at a rate higher than the actual initial rate for your loan. This accounts for the fact that your rate may increase when it becomes adjustable. If it does, lenders want to make sure you can handle the higher payment. In many cases, the “qualification” rate for an ARM is above the current rate for a 30 year fixed mortgage. This means it may actually be easier to qualify for a 30 year fixed than an ARM at a lower rate.

How ARMs Work

Most adjustable-rate mortgages are based on the Secured Overnight Funding Rate or SOFR index. ARM’s using this index adjust every 6 months.

Adjustable-rate mortgages also have a “margin” associated with them. The margin for your loan is a fixed percentage and is added to the index to calculate your rate when it begins adjusting.

The formula used to determine your rate when your loan begins adjusting takes the underlying index value and adds it to the margin. The sum of these two numbers determines your rate for the next six months. Here are a couple of examples:

ARMs also carry periodic and lifetime “caps,” which limit how high or low the interest rate can go during your loan’s adjustable period. For example, most ARM interest rates can’t increase more than 5 percent above where they start, regardless of how high the underlying index has risen; if your initial rate was 5.5%, it will never go above a lifetime cap of 10.5%.

Periodic limits may also cap the rate each time it’s up for an adjustment. For most loans, that limit is a 2-percent increase each six months.

Lending can be a risky business. That’s why your loan’s interest rate rises or falls based on the lender’s perceived gamble. One of the primary ways lenders assess that risk is by looking at occupancy.

Owner-Occupied Properties

Lenders provide the best interest rates and terms for owner-occupied properties because they assume that borrowers who live in a home will do whatever it takes to keep up with mortgage payments — and keep a roof over their heads.

How does a property qualify as owner-occupied? The buyer has to move in within 60 days of closing. If it’s a refinance, the borrower must already live in the property.

And for two- to four-unit buildings, borrowers have to occupy at least one of the units as their primary residence. But the good news is you can still qualify while renting out the remaining units.

Second Homes

Interest rates and terms available for vacation (second) homes are generally higher. And lenders may require a larger down payment than for a primary residence.

To consider a property a second home, the normal requirement is for the property to be at least 35 miles from your primary residence. However, that number’s a bit more flexible in the Bay Area, where a San Francisco resident may own a second home in Napa or an Orinda homeowner may want a pied-à-terre in the city, which are both less than 35 miles from their primary residence.

If the lender will not consider a property to be a second home, it will be treated as an investment property and subject to higher rates and more restrictive loan guidelines.

Finally, two- to four-unit properties generally will not be considered a second home by lenders even if you plan to use one of the units as a vacation home.

Investment Properties

Lenders consider any property that’s not a primary residence or second home an investment property.  “Non-owner occupied properties,” as they’re also known, generally require a larger down payment and higher interest rate because lenders perceive them as a riskier proposition.

Property type also affects your loan options because different kinds of residences carry more risk for lenders.

Single-Family Residences

Mortgages for single-family homes generally land the lowest rates and best terms, simply because they’re a safer bet for lenders. Unlike condominiums, single-family homes are freestanding and usually remain free from homeowner’s association guidelines.

Because single-family homeowners may modify and decorate their property as they like, subject only to local zoning ordinances, lenders can resell a foreclosed home with fewer restrictions to a larger pool of buyers. This makes them less risky than other types of property.

Condominiums

Most condominiums are single-family residences that share walls and amenities with other units in the building. Other condominiums are freestanding but located within a condominium community.

In both cases, homeowners associations, or HOAs, govern these communities according to a set of rules in the Covenants, Conditions, and Restrictions document, or CC&R.

An HOA may ban pets or control minor details like what kind of curtains are allowed – forget the purple cow print! The HOA also has the ability to act on behalf of owners in disputes. In newly constructed condominiums, it’s not uncommon for the association to sue the property builder for defective workmanship.

Those additional restrictions and the prospect of litigation make lenders see condos as riskier than single-family homes. Should the lenders take back a property due to nonpayment, CC&R rules may limit their ability to sell or rent it.

Interest rates and terms for condominiums are the same as for single-family homes with one notable difference: If you need to borrow a loan amount within the high-balance conforming range (up to $806,500), you’ll have to put down 25 percent to get the same rate as you would with a 20-percent down payment on a single-family home. Otherwise, your interest rate will climb a bit higher.

2 to 4 Unit Properties

Conforming loan limits for two- to four-unit properties run higher than those for single-family homes or condos. This means you can still get a conforming loan for a property with two to four units that wouldn’t be available for a single-family residence of the same price.

As with single-family homes, there are two categories of conforming loans for two- to four-unit properties: traditional conforming and agency jumbo/high balance. Here are the current conforming loan limits for two- to four-unit properties:

Lenders prefer that you invest your money alongside theirs so that you share in the risk they’ve taken on by lending you money. The smaller your down payment the less you have at risk, which makes it more likely that you might walk away from your home if you fall behind on your mortgage payments. For this reason, the size of your down payment will directly impact your interest rate and loan terms.

In general, larger down payments lead to lower rates and less restrictive loan terms, and smaller down payments come with higher rates and potentially the requirement for mortgage insurance.

20% down is the industry-standard for all types of loans. As long as you put down 20%, you will have access to favorable interest rates and avoid mortgage insurance. Making a down payment of less than 20 percent usually leads to a higher interest rate, less loan options, and a requirement for mortgage insurance.

Mortgage insurance is an insurance policy taken out to insure the lender against the risk of default. The smaller the down payment, the more expensive the mortgage insurance will be. For example, mortgage insurance rates for a 15% down payment will be lower than for a 5% down payment. Mortgage insurance is an additional amount you pay each month on top of your mortgage payment.

Below are the standard minimum down payments and their impact on rates and options for your mortgage.

Gifts

It’s becoming more common for buyers to receive financial help from family members when purchasing their first home.

As long as you meet the minimum requirements for your loan, you may receive gift funds from family to round out your down payment. However, be prepared to show the lender a “gift letter” detailing the donor’s name and familial relationship to you, as well as the gift amount. The letter should also state that you don’t need to repay the money.

In addition, lenders require that buyers using gift funds to partially finance a standard 20% down payment contribute at least 5 percent of their own money. For example, if you’re making a 20% down payment and receiving 15% of the gift, the other 5% must be from your own funds.

However, those who are lucky enough to receive 20 percent or more of the purchase price as a gift needn’t put any of their own cash down. They will, however, still need their own money for closing costs and the other expenses associated with buying a property.

Lines of credit, also called “home equity lines of credit” or “HELOCs,” are adjustable and initially include only interest rather than principal payments. The interest rate is based on a margin over the “prime” rate of interest, the rate the Federal Reserve charges member banks to borrow money to meet withdrawal demands. Prime is the index lines of credit are based on.

Prime rate changes affect the interest rate of home equity lines of credit, which usually allow you to borrow money and make payments of interest for the first 5-10 years of the loan. After that, the lender requires principal repayment.

Lines of credit are a great solution if you’re planning to do some work to your home but you’re not sure when the work will begin, or how much it will cost. You can take out a line of credit in advance of your project and then draw the funds when you need them. You’ll pay interest only on the funds you have borrowed with no obligation to borrow to the full amount available.

It’s important to note that lines of credit are not only for home-improvement projects. They are yours to use for any expenses you might have, whether they are related to your home, or not.

A big advantage offered by lines of credit is that you can draw funds out, and pay them back, whenever you want. This makes them a very effective cash management tool. When you need additional funds you can draw them out. Conversely, when you have excess funds in your other accounts you don’t need in the short term, you can use them to pay the line down and lower your interest payments.

Bridge Loans and Buying before Selling

If you already own a home and you’re thinking about buying a new one, you’ll probably want to buy before you sell for the following reasons:

• You don’t want to be homeless temporarily
• You don’t want to sign a lease because you don’t know how long you’ll need to rent an apartment
• You don’t want to move twice – first to a temporary rental, and then to your new home
• You want your current home to be vacant and staged so when it’s on the market it will sell faster and for the highest price possible

Buying before Selling without a Bridge Loan

When you purchase a new home before selling the one where you live, your current home is called your “departing residence”. You have three options for buying a new home before selling your departing residence without using a traditional bridge loan:

1. Buy a new home using funds you already have for your down payment. And, qualify for your purchase with the costs of your current home still in your debts. If this is your situation, great! You don’t need a bridge loan or specialized financing for your purchase. You can buy before you sell.
2. Buy a new home using funds you already have for your down payment but qualify for your new mortgage by excluding the costs of your current home. If you have enough money for your down payment, but not enough income to carry both properties, you’ll need this option.
3. Buy a new home by tapping into your current home’s equity for your down payment and qualify for your purchase by excluding the costs of your current home. If your down payment is tied up in your current home, and you don’t have enough income to carry both properties, you’ll need to utilize this option.

If you need to use the equity in your departing residence for down payment, I’ll help you secure a line of credit against your current home. Once that’s in place, you’ll have a source for your down payment funds. I’ll then pre-approve you for your purchase by excluding the costs of your current home, including your current first loan and the new line of credit secured against it.

With my preapproval in place, you’ll be ready to start searching for your new home. After you’ve found one and your offer is accepted, you’ll move forward with closing your purchase. Before closing, the new lender will require that you either provide attestation that you plan to sell your departing residence within a certain amount of time, or list your departing residence in the MLS prior to closing. The applicable guideline depends upon the lender being used. When your purchase closes, you can then move into your new home – before selling your departing residence.

It’s important to note that although some lenders will ask you to list your departing residence for sale before you’ve closed on your purchase, it’s okay for your listing to be reflected as “coming soon” in the MLS. A coming soon status indicates the property hasn’t been prepped for the market, but could be shown and sold if you agree. This gives your agent time to prepare your home before it is “active” in the MLS with days on the market accruing.

Buying before Selling with a Bridge Loan

If you have sufficient income to carry two properties, and also qualify for a down payment loan, you might want to use traditional bridge loan financing for your purchase. Bridge financing is a loan secured by the equity in both properties – the one you own, and the one you are purchasing. Here’s an example of how it works:

• Your current home is worth $1 million and your loan balance is $450,000.
• You purchase a new home worth $1.5 million. The total value of both properties is $2.5 million.
• The bridge lender requires that you have a maximum loan-to-value of 70% of the combined equity in the two properties. Your current property has $650,000 in equity, and the new one has $1.5 million. Total combined equity is $2.15 million. A 70% loan-to-value based on this equity allows for a loan amount of just over $1.5 million.
• The bridge lender will provide $1.5 million in financing so you can purchase your new home without using any of your funds for the down payment.

Bridge loans generally have a term of 6 months. This provides sufficient time to sell your old home and pay it back. The proceeds from your sale will pay off a portion of the bridge loan with the rest paid off using proceeds from refinancing your new property to a conventional loan.

The advantage of using a traditional bridge loan is that it’s simpler than securing a line of credit in advance and having to list (or at least attest to listing) your current home before your purchase closes.

The disadvantage of traditional bridge financing is that it’s an additional loan expense you’ll need to take on while you still own both homes. And, after you sell your departing residence, you’ll need to refinance to a traditional loan. The risk is that market rates may have risen since you closed on your purchase. Last, if you don’t have sufficient equity in your current home, a bridge loan may not provide enough funds for your down payment, in which case you’ll still need to use your own funds to round out your down payment funds.

Private loans come with higher rates, larger upfront costs, and shorter terms than traditional loans, but work well for investors who are looking to acquire a property and then resell it at a profit.

For example, you may want to purchase a “fixer” home, remodel it, and then sell it at a higher price. Many “fixer” properties are not eligible for standard financing because they are not considered “habitable”. For example, the kitchen has been removed, the bathrooms don’t function, or the property is simply not safe to live in. A private loan will let you purchase the property so you can complete the work required and then re-sell it. Private lenders generally do not have the same requirement for habitability that traditional lenders have.

Private loans also work well for investors looking to purchase and reposition apartment buildings. For example, you may want to purchase a building with no (or very low) current income, remodel the units, and then rent them at market-rate rents once your project is completed. Since your plan is to hold onto the building after the work is done, your exit from the private loan would be to refinance to a traditional loan at a lower rate. With the units rented, your property should qualify for traditional financing based upon rental income for the building.

Another reason investors often use private financing is so they are able to make an offer with a quick closing timeframe and no contingencies. Private lenders often require very little due diligence upfront and can work very quickly. If you’re up against other buyers paying cash, a private loan may be the only way for your offer to be competitive. So, even though the property qualifies for traditional financing (it’s not a “fixer” or vacant apartment building), a private loan may still be the right solution given the situation!