What Is a Jumbo Rate Mortgage?

Some mortgages march to the beat of a nonconformist drummer – they just don’t fit into the “conforming” box of loan products. These nonconforming mortgages have their own set of eligibility guidelines, and when their maximum loan amount exceeds the requirements for conforming mortgages, a borrower is looking at what’s called a jumbo mortgage. Jumbo rate mortgages carry home loan interest rates that are specifically assigned to jumbo mortgages.

TL;DR (Too Long; Didn't Read)

A jumbo rate mortgage is a nonconforming loan that exceeds Freddie Mac and Fannie Mae conforming guidelines, and which bears an interest rate according to its higher loan amount.

Conforming Vs. Nonconforming Mortgage

All the talk of conforming vs. non-conforming in the mortgage world boils down to the guidelines of two government-sponsored enterprises – Freddie Mac and Fannie Mae. These governmental entities, created by Congress, don’t actually make mortgage loans, but they guarantee qualifying mortgages that are extended by banks and other direct lenders. If a lender wants to sell a mortgage (or a pool of mortgages) to Freddie or Fannie, each mortgage must conform to Freddie and Fannie guidelines.

Conforming Loan Thresholds for 2019

One of the conforming guidelines is the maximum dollar amount of the mortgage, called the loan limit. This amount changes each year because of a mandated adjustment that reflects changes in average U.S. home prices. For 2019, the maximum conforming loan limit is $484,350 for most one-unit homes. The exact dollar amount, however, is based on the location of the property, which can exceed this loan limit. You don't need to search for your jumbo loan limit by ZIP code because you can find the maximum cofnorming loan amounts by county on search engines like this one from nerdwallet.

“High-cost areas” are places where 115 percent of the local median home value is more than the baseline loan limit of $484,350. In these areas, the maximum conforming loan limit is $726,525, which is 150 percent more than the baseline limit. In other areas, such as Alaska, Hawaii, Guam and the U.S. Virgin Islands, the high-cost loan limit is also the baseline limit, which means that conforming mortgages in these areas may exceed $726,525. Jumbo mortgages fill the need when a loan limit exceeds the limit in the area where a borrower lives.

Qualifying for Jumbo Rate Mortgages

You’ll probably run into a more stringent qualifying process for a jumbo mortgage than if you were qualifying for a conforming loan. Your lender will face a bigger credit risk and the loan will not be guaranteed by Freddie or Fannie, which means you’ll likely have to jump through a few more qualifying hoops.

As a rule of thumb, you’ll need a credit score of at least 700 and a debt-to-income ratio of less than 43 percent. You’ll also need proof of your ability to make payments, between your income and cash reserves, with enough cash reserves on hand to total six months of your mortgage payments.

Jumbo Mortgage Rates

You may expect that the interest rates on jumbo mortgages would be higher than the rates on conforming loans, to help mitigate a lender’s risk. And this was certainly the case in former years. But recently, this gap is narrowing; in fact, it’s not uncommon to find lenders that extend the same interest rate to jumbo loans as they do for conforming loans. In some cases, borrowers can even find jumbo mortgage rates that are lower than conforming rates.

As an example, on Sept. 9, 2019, Wells Fargo quoted a 30-year fixed-rate annual percentage rate of 3.717 percent for conforming loans and a 30-year fixed-rate APR of 3.533 percent for jumbo loans. Because different lenders offer different loan terms, borrowers can find their best mortgage rates for a jumbo mortgage by shopping different lenders.

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