What is a Jumbo Mortgage?

A jumbo loan (also called a nonconforming loan) is a loan that exceeds the conventional loan limits set on an annual basis by the Office of Federal Housing Enterprise Oversight (OFHEO). So, Freddie Mac or Fannie Mae, the largest buyers of mortgages and other government agencies do not back jumbo mortgages.

Since these loans exceed the normal or regular loan limits they often carry more risk than more conventional loans. Though interest rates are lower than they have been in years, jumbo loans typically have a higher interest rate than a conventional loan.

Due to the size of jumbo loans, they are more commonly found with luxury or larger sized homes or in housing markets where the average home price is far beyond what it would be in other states or areas. For example if the federally backed agencies, like OFHEO set the conventional loan limits at a max of $250,000, those wishing to find a house in California would find it nearly impossible to find a home for only $250,000.

Though the location of jumbo loan housing is not typically a tough sell, the large mortgages attached serve to make these loans a big risk because it is usually harder to sell such a home to the average homebuyer. This is especially true if you are not in prime real estate areas. Since jumbo loans are riskier than conventional loans, it usually takes great credit to be able to qualify, especially in tight credit times such as these. The rule of thumb has been that you may need a credit score of 680 to qualify for a jumbo loan. However creditors have traditionally looked for a minimum credit score of 700, and you may find that lending institutions are demanding even higher credit scores today.

And while down payments have been flexible when looking at conventional mortgages in the past, jumbo mortgages have always required a 20-25 percent down payment in most of the real estate markets where jumbo loans are common. Although it is possible to acquire a second conventional mortgage for this down payment; or at least a percentage of this required down payment amount. However, this may have changed recently as a result of the current housing market.

Around the time that the stimulus package was being decided on, government leaders felt the need to step in and attempt to make jumbo loans more readily accessible, by passing rules that would allow a significant number of jumbo loans to be treated like normal or conventional home loans. This was achieved by raising the amount that government agencies such as Freddie Mac and Fannie Mae to almost $730,000 would be able back.

Unlike the sub-prime mortgage decisions, this rule was not created to allow people with shaky credit the ability to purchase million dollar homes. Instead, the idea was that it would help those with good credit and a sizeable down payment, afford homes in areas where housing costs are more expensive than the rest of the country.

Unfortunately, these new rules have only been created to spur borrowing due to the downturn in the housing market, and they are supposed to revert back to the old rules at the end of the year. And, since interest rates on jumbo loans still remained high, many in the financial sector have dimmed their appeal to their customers, seeing few reasons to change their offerings for such a short period of time. Especially since the most recent incarnation of jumbo mortgage loans are either on longer terms than conventional loans, often reaching 50-year amortizations; or have interest only terms. These newer loan options allow borrows to obtain jumbo mortgages without having to incur additional private mortgage insurance or PMI costs by typically opting to take a slightly higher interest rate and/or the lender paid mortgage insurance or LPMI.