What Is a Jumbo Rate Mortgage?

High-value mortgages are subject to jumbo rate terms.

High-value mortgages are subject to jumbo rate terms.

"Jumbo rate mortgage" sounds like an exotic financing term fit for the circus. It is, however, just a simple term to refer to the total amount of the mortgage loan. After a certain dollar limit, a loan is considered a jumbo mortgage and brings a new set of requirements and higher interest rates.

Jumbo Mortgage Basics

Jumbo mortgages are high-dollar-value loans that exceed conforming loan limits. Conforming limits are the maximum loan amounts that mortgage finance lenders Fannie Mae and Freddie Mac will buy. The limits can change at any time, and they vary by geographic location.

After the 2007 mortgage crisis, two tiers of jumbos were created: the jumbo conforming loans and super-jumbos. In 2010, conforming loans were $417,000 or less. Conforming jumbos were between $417,000 and $729,000 (dropping to $625,500 in 2011) depending on the location, and super-jumbos were anything above those limits. Even within the same state, certain cities and counties have higher jumbo limits, so if you're looking to buy an expensive home, you need to research the limits in your areas.

Jumbo Loan Requirements

You can pretty much forget about qualifying for a jumbo unless you can make a 20 percent down payment or have a minimum of 20 percent equity when refinancing. New York City co-op apartment buyers may even be required to put down at least 25 percent. Income requirements are closely scrutinized, and proof of income and ability to pay needs to be documented. Lenders will want to see a debt-to-income ratio of more than 38 percent. This means you can't have monthly house payment of more than 38 percent of your pre-tax income. High credit scores are a must. Jumbo loans on second homes or investment properties are even more difficult to come by.

Interest Rates

If you're looking for a jumbo, be prepared for jumbo rates. Banks consider jumbos to be more risky, and foreclosures on high-priced homes are more costly for lenders to process. Therefore, the interest rates on jumbos are correspondingly higher than conforming rates. The difference can be 1 percent or more. While that seems like a small number, it really adds up over the life of the loan.

Jumbo Loan Strategies

Many jumbo borrowers take out multiple loans. You can get one mortgage within conforming limits at a lower rate. Then you piggyback a second jumbo loan on top of that for the additional money. It seems a bit complicated, but even borrowers within conforming limits sometimes use a piggyback strategy, such as combining a fixed-rate loan with a smaller, adjustable-rate product. You may not qualify for a second mortgage, but it's a strategy that many people find is worth attempting.

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About the Author

Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.

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