Jumbo Mortgage Loan Financing
Jumbo loans are conventional, non-conforming loans
Jumbo loans are conventional mortgages that do not “conform” to Fannie Mae (FNMA) or Freddie Mac (FHLMC) loan guidelines, because their loan amounts are higher than the maximum loan amounts established for GSE-eligible loans. Any loan with an amount greater than conforming limits is a “Jumbo” loan.
Who are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are stockholder-owned, publicly-traded Government Sponsored Enterprises (GSEs), which were originally introduced by the federal government and later privatized. The sole purpose of these two agencies is to provide liquidity to the mortgage market by purchasing closed mortgages, which frees up funds so lenders can make more home loans. However, Fannie and Freddie only purchase loans up to a specified, maximum loan amount.
What are conforming loan limits?
The conforming loan limit is the maximum loan amount eligible for purchase by Fannie Mae or Freddie Mac. (Limits are reviewed every January, although they do not change yearly.) All loans above GSE-eligible limits are called Jumbo, or non-conforming loans.
Are interest rates the same for Jumbo loans?
Interest rates for Jumbo loans are typically higher than interest rates for conforming loans due to the enhanced level of risk associated with lending larger loan amounts. For example, a lender’s exposure to loss is diminished when they provide four $250,000 loans to four different borrowers and properties, vs. a single $1,000,000 loan to a single borrower and property. This increase in liability is the reason interest rates are higher for Jumbo loans.
Frequently Asked Questions:
Q: What is a Jumbo loan?
Jumbo loans are conventional, non-conforming mortgages that can not be purchased by Fannie Mae and Freddie Mac, because their loan amounts are higher than the maximum loan amounts established for GSE-eligible loans.
Q: Why are interest rates for Jumbo loans higher?
Jumbo mortgage rates are typically higher due to the lender’s increased liability associated with financing a more expensive property, which may be a challenge to re-sell if the borrower defaults.
Q: Is Mortgage Insurance (MI) required on a Jumbo Mortgage?
PMI is required if the loan-to-value (LTV) ratio is greater than 80%.