A jumbo mortgage is one that loans out a larger amount of money than the highest amount allowable to loan out for a conforming or conventional loan. Currently, jumbo mortgage interest rates are at a 25 year low and their current rates are even lower than traditional and conforming loans which loan out less money. The first instinct is to wonder why because when you were borrowing a higher sum of money it seems to be a higher risk which would then seem to be a reason for a higher interest rate.
Why are banks willing to give a lower interest rate for a higher amount of money loaned out on a jumbo loan?
Qualifiers are stricter for applicants
Much of the reason for this is in the fact of what it would take to qualify for jumbo loan approval. To qualify for such high loan amounts jumbo loan borrowers are often expected to have a much lower debt to income ratio, a much higher credit score of at least 700, a significantly larger down payment of at least 20%, and higher reserve funds than a conforming conventional loan would expect a borrower to have. A borrower that has these qualifying factors is seen as a lower risk to lend money to even if it is in a higher amount.
There are fewer fees for the bank to pay
Another reason that jumbo loans have lower interest rates is that these loans are not sold or expected to be sold to the federal entities of Fannie Mae and Freddie Mac. For this reason banks have more flexibility to make their own payment rules as well as other qualifying rules. Fanny Mae and Freddie Mac charge specific fees called guarantee fees to help guard against any default loan exposure. Jumbo loans are cheaper for banks partially because they are not paying these required fees from Fannie Mae and Freddie Mac.
There is more value in the property
The types of properties that jumbo loans cover are going to have a much better collateral should the jumbo loan for some reason fall through. Additionally, customers who qualify for jumbo loans most often have more equity in the property as they are required to make a more significant down payment on the home which automatically gives the home owner 20% equity in the home as opposed to a loan that only requires a 3 to 5% down payment.
For more information on your mortgage options in Mission Viejo and surrounding areas please contact me any time.
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