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Jumbo mortgages are different from traditional mortgages because they exceed the conforming limit set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase mortgages from commercial lenders.
What are jumbo mortgages?
Jumbo mortgages are those with loan sizes above the maximum that is subject to guarantee by Fannie Mae and Freddie Mac, currently $510,400 in most markets and up to $765,600 in designated high-cost markets, says Greg McBride, chief financial analyst for Bankrate.
The amounts for jumbo loans vary by state and the counties within them: a jumbo loan in certain parts of California could be a $1 million loan while one in Virginia could be $750,000, says Mat Ishbia, CEO of United Wholesale Mortgage in Pontiac, Michigan.
What are the down payment requirements for jumbo mortgages?
The down payments for jumbo mortgages vary from traditional mortgages of a lower value. Since there is less of a secondary market and more of these loans are actually held in the lender’s portfolio, down payment requirements are more at the lender’s discretion, McBride says.
“This can mean a down payment higher than the traditional 20 percent and instead be at 25 percent or 30 percent, but some lenders offer programs that have lower down payment requirements,” he says.
What about jumbo loan interest rates?
Interest rates for jumbo loans should mirror those for conforming loans.
“The long-held practice was that jumbo rates were higher than conforming loans because they lacked the government guarantee,” McBride says. “However, in the years following the financial crisis we have seen that change as the secondary market for jumbo loans all but disappeared, loan performance was particularly strong relative to smaller conforming loans and additional add-ons were tacked onto conforming loans.”
Lenders today commonly offer jumbo loans at a comparable or lower rate than conforming loans, he says.
Jumbo mortgages and credit scores
But rates for jumbo loans are also tied to the credit profile of the individual seeking the loan. Credit scores are important in determining the interest rate that homeowners receive for a mortgage, which impacts the monthly payment.
“Credit scores are a critical input in the lending decision,” McBride says. “Lenders may use compensating factors such as higher income or significant assets to offset a deficiency in the credit score and this tends to be more common in jumbo loans than the smaller conforming and government-backed loans.”
Potential homeowners shopping for a higher end home or one in a more expensive housing market such as Hawaii, San Francisco or New York are more likely to need to take out a jumbo mortgage.
Use Bankrate’s mortgage calculator to see how different loan amounts, interest rates and term lengths affect the mortgage payment.