‘Jumbo’ loans may carry higher rate due to restrictions

What is a jumbo mortgage and how do you know if you need one? A home loan is considered jumbo if it exceeds the so-called conforming amount, which in most cases is anything over $417,000 for a single-family home.

“Conforming” refers to the limits imposed by Fannie Mae and Freddie Mac, the government organizations that buy mortgages from lenders. Because these larger “jumbo” loans cannot be sold to these enterprises, they have to be held by the lender, whether it be a bank or private capital.

And as you might imagine, since jumbo loans are not guaranteed by Fannie or Freddie, the risk is higher, so the rates have tended to be higher, though that gap has narrowed in recent years. Even if and when they are higher, it is by a small amount, such as half a percentage point.

The formula for quali- fying for a jumbo loan is similar to that of a conforming (non-jumbo) loan, with qualification based on the usual factors like credit, liquidity, debtto-income ratio and so on. Still, because the loans are larger, the numbers in the formula tend to be bigger. And, since these are portfolio loans, meaning they are held by a lender rather than sold into the secondary market, qualifications vary from lender to lender.

To be clear, a jumbo mortgage is one that is above $417,000, but that does not mean the home being purchased is that amount. We’re talking about the amount of the loan. So, for instance, if you purchased a home in Atlanta for $500,000 and put down 20 percent ($100,000), your $400,000 loan would not be a jumbo.

Also, the titleholder on a jumbo may not necessarily be an individual; for instance, the titleholder might be some kind of corporate entity. Still, the borrower is always a person, as mortgages are made to individuals, not entities.

The exception to the jumbo threshold is in some areas of the country where housing costs are designated “high cost” by Fannie and Freddie. These include areas you might expect like Greenwich, Connecticut, parts of South Florida and Hawaii, but also about 100 other places. The jumbo limit in high-cost areas falls between the aforementioned floor of $417,000 and may not kick in until $625,000. The only Georgia market considered high cost is the Lake Oconee area in Greene County; otherwise, a jumbo loan here is anything above $417,000.

In addition to primary residences, jumbo mortgages may also be used for second homes and investment properties. And, as with conforming or nonjumbo loans, jumbos may be fixed-rate or adjustable-rate, though the latter is more the norm in the jumbo world.

Again, the availability, application and terms of a jumbo mortgage will vary depending on your lender, as well as on your own circumstances.