If the house you have your eye on happens to cost about double the average home in the U.S., you’re probably going to need a jumbo loan to buy it. Not sure what a jumbo loan is or what to expect with this type of mortgage? Here’s what you need to know about what sets jumbo loans apart from other loans, and how jumbo mortgage rates compare to others. Take a look at the facts on jumbo loans, and then be sure to let your real estate agent know if you have any questions about this type of mortgage as you start looking at houses.
Simply put, a jumbo mortgage is a home loan that is able to exceed the limit that conforming loans have to abide by, making it a non-conforming loan. So what does that mean exactly? Well, the Federal Housing Finance Agency sets the limits for home loans for conforming and non-conforming (or jumbo) loans.
A conforming loan is a loan that is backed by a government agency like Freddie Mac or Fannie Mae, and as such, it has certain guidelines it has to meet—including a maximum amount. The conforming loan limits change every year, and when a loan goes over those limits, it becomes a non-conforming loan. For 2020, the limit on conforming loans is $510,400 in most cities. The only exception is that some high-cost areas have a limit of $765,600 for conforming loans.
If the loan you need for the house you want to buy will be higher than that, you’ll need a non-conforming loan. In other words, you’ll need to get a jumbo mortgage. And before you do that, it’s important to learn what the jumbo mortgage rates are and how this loan differs from other types of mortgage loans.
Just as the interest rates on other types of home loans vary on a regular basis, so do jumbo mortgage rates. As a result, sometimes jumbo mortgage rates are lower than the rates of conforming home loans, and other times, they’re higher. It all depends on when you buy your home.
More specifically, for years, jumbo mortgage rates were frequently a lot higher than the interest rates for conforming loans. Recently, jumbo mortgage rates have come down quite a bit and are closer to conforming loans, but they’re still slightly higher.
The reason for the higher rates is that lenders view these loans as riskier than the average home loan. After all, they’re often loaning out at least double the average conforming loan amount, so they lose more money if the home is foreclosed on. Also, non-conforming loans are not backed by Fannie Mae or Freddie Mac like conforming loans are, so lenders don’t have this assurance to fall back on.
While interest rates change daily, you can get an idea of the difference between jumbo mortgage rates and conforming loan rates by looking at the rates listed for one day. On August 13, 2020, the 30-year fixed rate for a conforming loan was 3.031%, while the 30-year fixed rate on a jumbo loan was 3.250%.
Similarly, the interest rate on a 15-year fixed conforming loan was 2.511%. Compare this to 3.000% on a 15-year fixed jumbo loan. The difference between jumbo mortgage rates and conforming home loan rates may be not huge, but it’s noticeable and can make a big difference in payments over the years.
As you can see, the main differences between conforming and non-conforming loans are the loan limits and interest rates. But there are a few other differences to consider before you choose a house that would require you to get a jumbo loan.
First, there’s a difference in down payment amounts. In general, a jumbo loan requires a bigger down payment. While conforming loans often encourage you to put 20% down, many loans of that type allow you to put 10% or even just 3% down. You won’t find the same kind of flexibility on a jumbo loan, as you’ll usually have to put 20% down. In some cases—like when you’re buying a very expensive home— you’ll need to put even more down, such as 25% or 30%.
Some lenders do go as low as 10% for the down payment on a jumbo loan. But in general, this is harder to find with jumbo loans than with conforming loans. If you really want to only put 10% down on a jumbo loan, you’ll usually need to prove you have excellent credit, high income, and good cash reserves. You’ll also want to talk to different lenders—including LemonBrew Lending—until you find a home loan that has a low interest rate and borrowing requirements that work for you.
Another difference is the required credit score. With jumbo loans, you typically need a higher credit score to qualify. In particular, your score will likely need to be at least 700 to get a jumbo loan. By contrast, conforming loans often approve borrowers with credit scores in the 500 range. Similarly, while conforming loans usually demand a debt-to-income ratio of about 43%, jumbo loans call for it to be even lower—making it harder to qualify.
Finally, jumbo mortgages usually come with higher closing costs, simply because the loan total is higher. For example, on a $250,000 loan, you’d pay $7,500 to $15,000 on closing day—as that’s 3% to 6% of the loan. But with a jumbo mortgage, you could be paying closer to $20,000 or even $40,000 on a house that costs $650,000. So prepare to pay a lot of money on closing day if you get a jumbo loan!
Now that you know what to expect from jumbo mortgage rates and the qualifications needed for this loan, it’s time to think about if it’s the right home loan for you. First, if the house you want is just above the conforming loan total, it’s typically best to lower the amount you finance so you can stick with a conforming loan. After all, conforming loans are easier to qualify for and typically have slightly lower interest rates than jumbo mortgages.
So if the house you want to buy is listed at $650,000—and the conforming loan limit for the area is $510,400—you may be able to avoid a jumbo loan by putting at least 20% down. This would equal $130,000 for the down payment, which would mean you’d only have to finance $520,000. If you and your real estate agent could also negotiate the price down by about $10,000, you’d end up just under the conforming loan limit!
If it’s just not possible to stay under this limit, a jumbo loan may be the best route to go. Fortunately, now you know how to qualify and which jumbo mortgage rates to expect. Next, you’re going to need a great real estate agent to walk you through the process of picking a home and qualifying for the loan. LemonBrew can help with this by matching you with a Partner Agent who will assist you from start to finish. We also offer LemonBrew Lending for when it’s time to look for the best rates for a home loan, so contact us today!