Plenty of lenders offer jumbo mortgages now, although the requirements are stricter than they used to be.
Jumbo mortgages are home loans that are bigger than normal. They exceed the "conforming limit" -- the maximum loan amount that Fannie Mae and Freddie Mac will buy.
The conforming limit varies by location. In most housing markets, it's $417,000, and any mortgage more than that is a jumbo. In the most expensive housing markets, such as Los Angeles, any home loan of more than $729,750 is a jumbo. A few places are in between. For example, Seattle's conforming limit is $567,500; a short ferry ride away in Port Orchard, Wash., it's $475,000.
In the go-go years, around 2003 to the middle of 2007, lenders steadily relaxed their standards on jumbo loans to compete for customers. Borrowers easily got jumbo mortgages without having to verify the income stated on their loan applications. Many lenders gave jumbo loans to homebuyers putting just 5 percent down -- for example, buying a half-million-dollar house with $25,000 down, and borrowing the remaining $475,000.
Beginning in August 2007, a credit squeeze scared lenders away from the jumbo market. Jumbos gradually returned, but with tougher requirements. To qualify for a jumbo mortgage today, you should expect:
- To make a down payment of at least 20 percent for a purchase (or have at least 20 percent equity in a refinance).
- To document your income.
- To get an adjustable-rate loan, because fixed-rate jumbos are relatively rare.
- For your monthly mortgage payment to be no more than 38 percent of your income before taxes.
Borrowers who meet those qualifications find that today's rates are attractive. "Yesterday I quoted a $900,000, five-year ARM at 4.25 percent," says Dan Green, loan officer for Waterstone Mortgage in Cincinnati. That loan quote was for a condominium with a down payment of 25 percent.
It pays to shop around for a jumbo mortgage because these loans aren't commodities. Most jumbos nowadays come from big banks that keep the loans on their books instead of selling them. These so-called "portfolio loans" exemplify old-fashioned lending, in which the bank makes money by charging higher interest rates on mortgages than they pay on their customers' deposits.
Interest rates on deposits are low nowadays, so banks can profit on jumbo mortgages even when they offer them at low rates. But rates paid on deposits will rise someday. So banks push jumbo ARMs whose rates will rise when rates paid on deposits go up. The most popular jumbos are 5/1 ARMs, which have an introductory rate that lasts five years, then adjusts annually thereafter. Another popular option is the 7/1 ARM. When the adjustment period comes, most of today's jumbo ARMs will move in relation to the 1-year Libor, although some are indexed to the one-year Treasury.
Lenders say that some of the biggest names in the jumbo market are Bank of America, ING, U.S. Bank, GMAC Mortgage and MetLife Bank. Other household-name banks are active in the jumbo market, too.
In the last two years, the biggest change in jumbo lending has involved down payments. It's difficult to find any bank that will approve a jumbo loan with less than 20 percent down payment or equity.