What are jumbo loans?
A jumbo loan is a mortgage on any property whose loan value is higher than the current “Conforming Loan Limit” of $453,100. The $453,100 figure actually goes into effect on January 1, 2018. Any conventional loans closed before then are limited to $424,100.
There is no maximum limit for jumbo loans.
The minimum down payment is 10%.
Generally, when discussing jumbo loans, we’re talking about mortgages for primary residences, second homes, or buy-and-hold investment properties. In other words, loans that look a lot like their conventional counterparts other than the loan amount.
Of course, there are options for the more specialized, high-balance loans like hard money, subprime, bridge loans, etc. However, these loans don’t have conventional counterparts, so there is generally nothing that separates them as far as size goes.
What are the main differences between jumbo loans and a conventional loan?
The quick answer: Jumbo loans have investor-specific guidelines while conventional loans largely cleave directly to Fannie Mae or Freddie Mac guidelines.
With conventional loans, each lender starts with the exact same set of guidelines, either from Freddie Mac or Fannie Mae. Some lenders underwrite directly from those guides. Some lenders choose to mitigate their risk even further by issuing their own set of “overlays.” Overlays essentially tighten various aspects of the underlying guidelines. For instance, a lender may have a maximum Debt-To-Income ratio of 43% even though the Freddie Mac guidelines max out at 50.49%.
With jumbo loans, there are no GSEs (Government Sponsored Entities) like Fannie or Freddie writing guidelines. Lenders may keep the loans they issue on their books, collecting payments and servicing the loan. More likely though, they have institutional investors they work with (large banks whose names your probably recognize) that are willing to buy the mortgage once it’s been originated. The investors usually offer guidance to the lender based on the types of loans they would like to purchase. That guidance is compiled into guidelines.
Since these loans aren’t backed by Fannie or Freddie, one of two things happens: the guidelines are more conservative in order to offer competitive rates or the guidelines are looser with much higher rates.
Do jumbo loans cost more or have higher interest rates?
As mentioned earlier: probably. At ATL Mortgage we strive to minimize the difference in costs. Let’s take a look at a couple of examples from today November 28th.
Scenario A: Conventional
Purchase Price: $500,000
Down Payment: 20% / $100,000
Loan Amount: $400,000
Middle Credit Score: 740
Interest Rate 3.875%
Lender Fees: $0
Scenario B: Jumbo
Purchase Price: $1,000,000
Down Payment: 20% / $200,000
Loan Amount: $800,000
Credit Score: 740
Interest Rate: 4.000%
Lender Credit: $2,926
Are There Alternatives To Jumbo Loans?
Yes: buy a cheaper house. Just kidding. You can use a Home Equity Line of Credit (HELOC) stacked on top of a conventional loan to approximate a jumbo loan.
There are a few reasons you may want to do this:
- You qualify for a purchase under conventional guidelines, but not under jumbo guidelines.
- You are expecting to be able to quickly pay off the HELOC using an upcoming lump sum. For instance in the case of a pending sale of your current property that is closing after your purchase.
- If the rate on jumbo loans is considerably higher than that of a conventional loan.
- (This doesn’t happen with ATL Mortgage, fyi).
How long does it take to close a jumbo loan?
Jumbo loans take a little longer to close than conventional loans. We can close them in 25-28 days. Read out post on how to close quickly, so you can partner with us in getting things done quickly and efficiently.