Jumbo Mortgage

Jumbo Mortgages

In the United States, a jumbo mortgage is a mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits.[1] This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a “jumbo mortgage”. Traditionally, the interest rates on jumbo mortgages are higher than for conforming mortgages, however with GSE fees increasing, Jumbo loans have recently seen lower interest rates than conforming loans.

On February 13, 2008 President George W. Bush signed the Housing and Economic Recovery Act of 2008 (Pub.L. 110–289, 122 Stat. 2654, enacted July 30, 2008) which temporarily increased the jumbo conforming limit in the United States. The limit was raised to $729,750 or 125% of the median home value within the metropolitan statistical area, whichever is the lesser.[2] Initially due to expire in December 2008, the new limits were extended through 2010.[3] Mortgage lenders did not freely adopt these new limits, making them essentially “theoretical,” as mortgages above the old conforming limit of $417,000 still attracted higher interest rates.[citation needed]

As of 2010, the limit on a conforming loan in “general” areas was $417,000 for most of the US, apart from Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the limit was $625,500. The limit in “high cost” areas was $729,750 and $938,250, respectively.

On October 1, 2011 the jumbo conforming limit of $729,750 in “high cost” areas was reduced to $625,500.

The Risks

Jumbo mortgage loans are a higher risk for lenders, mainly due to their larger size rather than credit quality. This is because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows in some cases. That is one reason lenders prefer to have a higher down payment from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.