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Getting A Jumbo Mortgage

A “jumbo” mortgage exceeds the conforming limit set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac). These two entities buy mortgages from banks once they have been originated. The conforming limit is the maximum loan amount that Fannie and Freddie will purchase. This limit varies from market to market, with the majority of housing markets having a limit of $417,000.

As a result, interest rates tend to be higher on 30-year jumbo loans than on conventional 30-year loans, to use a common comparison. Both 30-year conventional and 30-year jumbo mortgage rates have been making record lows of late, with the 30-year conventional down to 4.11 percent per Mortgage News Daily as of September 6, 2011. The 30-year jumbo loan has fallen to 4.48 percent as of the same date. There is a gap between the two rates which has narrowed to a mere 37 basis points or 0.37 percent. Such a low spread reflects falling interest rates throughout the economy, thanks to strong downward pressure from the bond market and the Federal Reserve.

In this environment, with record low mortgage rates jumbo, ordinary expectations would be that appetite for jumbo mortgages would be high. Unfortunately, such is not the case. Getting a jumbo loan requires meeting certain standards set by lenders, because the risk for making a jumbo loan is much higher. Due to the financial crisis and collapse, lenders now set strict standards on jumbo mortgages. Prospective borrowers must make a 20 percent down payment, document their income and have their monthly payment be no more than 38 percent of their before-tax income.

Jumbo loan rates are so low due to interest rates being low. The reason for this obvious correlation is the bank can afford to offer jumbo loans at such low rates because it can pay depositors a low rate of interest. While this is bad news for depositors, it is great news for borrowers wanting to take out jumbo loans. Low mortgage rates jumbo would be stimulative in this market, as they were from 2003 to 2007. Today, they only entice existing borrowers to refinance to a lower monthly rate and a lower monthly payment.

The loan-to-value requirement for a jumbo loan requires a higher equity position. Low jumbo loan rates are not enough. The lender must protect itself from a repeat of the disastrous 2008 crash.