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What is a Jumbo Mortgage?

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A jumbo mortgage is a home loan in an amount greater than the industry-standard definition of conventional conforming loan limits. Until recently any loan over $417,000 was considered "jumbo." This standard is set by the two quasi-governmental agencies, Fannie Mae and Freddie Mac. Recent financial regulation temporarily increased the size of loans that Fannie Mae and Freddie Mac can buy from lenders, but a price premium is charged for loans in this "Agency Jumbo" category. As a result, two size categories of "jumbo" loans exist:

Agency Jumbo	Jumbo
$417,001 to $729,750*	Loans over $417,000, typically over $650,000

* County-level limits may be lower. $625,500 in Alaska, Hawaii, Guam and the U.S. Virgin Islands. Maximum loan amounts are higher for 2-, 3- and 4-unit properties.

Unlike conforming loans ($417,000 and under) which are nearly all sold to Fannie Mae and Freddie Mac, jumbo loans are created by and traded among large banks, insurance companies and other financial institutions.

Jumbo Mortgage Rates

The average interest rates on jumbo mortgages are typically greater than is normal for conforming mortgages, and vary depending on property types and mortgage amount.

Jumbo Mortgage Rates Determined by Risk

The higher rates found on jumbo loans are due to the higher risk these loans pose to lenders. The spread, or difference between the two rates, depends on the current market price of risk. While the usual premium paid on jumbo fixed rate mortgages is roughly ½%, there have been times of high uncertainty, such as in 2007, when lenders were charging a premium of over 1.5% on jumbo loans compared to conforming loans.

Jumbo mortgage loans are a higher risk for lenders because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price compared to a more modest home. This added risk is one reason lenders prefer to have a higher down payment from jumbo loan seekers. Many jumbo lenders also require two separate appraisals to substantiate the property value before they will lend.

Jumbo Loan Programs

Jumbo mortgage loan options are similar to traditional loan programs. They simply require a slightly higher down payment (or equity in an existing home for a jumbo refinance). Individual program requirements vary, but generally an owner occupied home requires 20% to 25% down payment or equity, while second homes and investment properties can qualify with 30% to 35% equity or more.

FHA Loans may be obtained in amounts up to $729,750, both for purchase and refinance. This program may permit a higher ratio of loan to home value (and therefore a lower down payment) than found on conventional jumbo loans.

Jumbo loans may be obtained in both fixed rate and adjustable rate formats, as well as hybrid loans with rates fixed for an initial period of three to five years.

Jumbo loans do not usually take longer to obtain than non-jumbo loans. Often jumbo loans involve obtaining two independent real estate appraisal reports instead of one, but these can be ordered concurrently, or nearly so.