What is a Jumbo Mortgage?

In the United States a jumbo mortgage or jumbo loan is a mortgage loan that provides a higher amount than would be allowed with a conventional home loan as it is not subject to the same limits imposed by Fannie Mae and Freddie Mac – two government-sponsored enterprises that put a cap on the value of an individual mortgage.

Freddie Mac (FHLMC) and Fannie Mae (FNMA) are agencies that buy American mortgages from banks, giving lenders more liquidity to lend more mortgages.

People can use jumbo mortgages to purchase a primary residence, a second or vacation home, and investment properties.

High interest rates

Jumbo mortgages typically have higher interest rates compared to conventional loans. This is because the lender is exposed to more risk with a jumbo mortgage.

The difference between the two rates is based on the current market price of risk. The spread tends to change by 0.25 and 0.5% or more – particularly during times of investor anxiety.

However, recent rises in GSE (government-sponsored enterprise) fees have caused interest rates to drop slightly.

The jumbo conforming limit has varied over the past few years. In 2008, President George Bush passed legislation that raised the limit to $729,750 (or 125%) of the median home value in a residential area. However, this has since been lowered to $625,500 in some areas.

There is a higher element of risk for lenders associated with jumbo mortgage loans because of their size (not credit quality). For example, if a jumbo mortgage loan defaults then it makes it more difficult to sell a luxury residence for its full price.

Qualifying for a jumbo mortgage

There is no private mortgage insurance with a jumbo mortgage, therefore the down payments are greater and, generally, the credit score can be lower than 700.

People applying for a bigger mortgage amount will have to show they have the income and assets to meet monthly payments.

According to bankrate.com, the maximum debt-to-income ratio for applicants is 45%. Borrowers will need at least six months’ worth of funds in their bank accounts after closing. In some cases, the required reserve amount for jumbo mortgage borrowers may be 20% of the loan.

Video – What is a Mortgage?

A mortgage is a loan that borrowers use to purchase a property.