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Jumbo Loans: An In-Depth Guide

jumbo loan guide

WHAT IS A JUMBO LOAN?

Jumbo loans are mortgages that exceed the conforming loan limit. Most counties in the United States have a conforming loan limit of $417,000 while pricier parts of the country, or high-cost areas, allow loans up to $625,500 before they reach jumbo mortgage territory.

It’s important to know the different categories of loan programs to put jumbo loans into perspective. You may ask, “Why are jumbo loan interest rates higher than FHA loans?” The reason has to do with the size of the loan and who takes the risk of borrower default.

Government Insured Loans

You may know the names of popular mortgage programs like FHA loans and VA loans. Private lenders make FHA and VA loans according to HUD guidelines, which are then insured (or backed) by their respective government agencies. Thus, we call theme government-insured loan programs. Lenders share some of the risk with Uncle Sam, which helps keep interest rates down. Furthermore, each type of government loan program has a lid, or maximum loan amount available to borrowers, which also reigns in some risks.

Conventional / Conforming Loans

Perhaps you’ve heard of conventional loans, mortgages made by private lenders and insured by private mortgage insurance (PMI) companies? Government Sponsored Entities (GSEs), like Fannie Mae and Freddie Mac, take delivery of conforming loans after they are made between lenders and consumers (you). Fannie and Freddie only take loans made in amounts below conforming loan limits.

Non-Conforming Loans

Now that you know about government backed and conventional loans, it will be easier to see how jumbo loans fit into the mortgage universe.

Jumbo loans are non-conforming mortgages; they exceed conforming loan limits and they are not insured by a government agency. Nor can jumbo mortgages be rolled up and sold to a GSE.  Thus, the lender either services the loan, bearing all the risk, or sells the loan on the secondary market (Wall Street and institutional investors). Since GSEs sell the vast majority of loans on to the secondary market, lenders looking to do the same have little tougher job to do. Anytime there’s friction in a transaction, some risk is added to the situation.

CONFORMING LOAN LIMITS

As mentioned, individual loan programs each have specific requirements and guidelines. But all lenders need to work with the same “yardstick” regarding maximum loan amounts. Thus, somebody has to be in charge of setting conforming loan limits. That responsibility goes to the Federal Housing Finance Agency (FHFA). Their determination is not arbitrary. In fact, they are transparent about their methodology. So how do they do it?

The FHFA compiles large data sets from GSEs about real estate prices across the country. The data includes repeat-sales and refinances on single-family homes where the property history is available from Fannie Mae or Freddie Mac. The data goes back to 1975. Pretty cool.

The FHFA creates a weighted measurement from the information they gather, called the House Price Index (HPI). The purpose of the HPI is to provide a timely measurement of housing affordability. Based on what they find, FHFA publishes the annual conforming loan limits.

High-Cost Areas

Wait a second! Buying a home in rural Utah is a lot different than buying one in Los Angeles. Home prices between these two areas are not even close!

FHFA creates some leeway, making conforming loan limit adjustments for counties and cities where home prices are considerably higher. In other words, the line where a loan crosses into jumbo mortgage territory varies depending upon the location of the property (and the price of homes nearby). By moving the line a little bit, conforming loans are more widely available in big cities. Conversely, fewer homes in high-cost areas need to be financed using a jumbo loan.

Conforming Loan Limits

If you’re living in or near a large city like San Francisco or New York, you’ll need a jumbo mortgage for a loan on a single-family residence that exceeds $636,150. For properties farther away from major cities, the bar is set lower. Here’s a quick guide:

  • $424,100 most counties
  • $636,150 in high-cost areas

CONFORMING LOAN LIMITS

UnitsMost CountiesHigh-cost Areas
1$424,100$636,100
2$543,000$814,500
3$656,350$984,525
4$815,650$1,223,475

Jumbo Loan Property Eligibility

Jumbo loans may be used to finance several types of properties.

  • Single family (1-4 units) in most counties
  • Second homes in most counties
  • Investment properties in most counties
  • Single family residences in high-cost areas

Conforming loan limits can change, depending on the number of units in the building. You may or may not need a jumbo loan. Here where jumbo loans kick in, by property type:

Additional Jumbo Loan Requirements

Lenders typically hold jumbo mortgages instead of delivering them to Fannie Mae or Freddie Mac. After all, the GSEs only take conforming mortgages. So, lenders come up with their own guidelines. However, if you’re looking for a jumbo loan, typical property and borrower and property requirements would look like the following:

  • 20% down payment will get you the best interest rate
  • 10% down (90% LTV) may still be possible, but perhaps at a higher interest rate
  • Borrower credit scores should be higher than 680 (some lenders will want FICO scores of 740 or better)
  • Borrower debt-to-income ratios (DTI) 38%
  • Owner-occupied properties OK
  • Secondary homes OK
  • Investment properties OK
  • $2 million loan limit ($3.0M reviewable case-by-case)
  • Mortgage insurance required when loan-to-value (LTV) exceeds 85% (or perhaps as high as 90%)

JUMBO LOAN FAQs

How do I know if I need a jumbo loan?

A jumbo mortgage is required if the loan amount you need exceeds the conforming loan limits for the area in which the property resides.

How big of a down payment will I need to make?

Non-conforming loans might be available with 10% down, but 20% down is better as you could avoid mortgage insurance. The down payment requirement typically goes up as the purchase price increases. Meaning, the down payment you need would be different on a $750,000 home versus a $1,500,000 home.

Is mortgage insurance required on a jumbo mortgage?

Jumbo loans are type of non-conventional loan, not insured by the government, nor sold off to GSE’s (Fannie Mae and Freddie Mac). Therefore, if the loan-to-value (LTV) is greater than 80%, private mortgage insurance (PMI) is required.

Why are interest rates higher for jumbo loans?

Interest rates for jumbo loans are typically a little higher than conforming loan rates. Most often, a 1/4 to 1/2 percent bump up can be expected. The higher rate is a premium, given the extra risks:

  • Larger properties may be harder to liquidate if the home is foreclosed
  • The loan is not HUD-insured
  • The mortgage can’t be sold off to a GSE

What types of properties are eligible for jumbo loan financing?

Most lenders will underwrite a jumbo loan for 1 to 4 unit properties, second homes and vacation homes.

What terms are available?

For jumbo loans, borrowers have a choice of a fixed-rate (FRM) or adjustable-rate mortgage (ARM).