The Jumbo vs. Conforming Difference Widens!
As of the date of this blog, December 13th, 2021, the rate for a $1 million jumbo loan at a 1/2 point cost is 2.5%.
The rate, however, for an $800,000 “high balance conforming loan” at 1/2 point cost is 3.25% (3/4% HIGHER than the jumbo rate).
These quotes are for pristine borrowers (800 FICO, etc.) and they illustrate just how big the spread is between conforming and jumbo rates.
In light of this massive spread, I want to touch on jumbo loans again.
What Is A Jumbo Loan?
Once again, a jumbo loan is any mortgage loan that exceeds the conforming (Fannie/Freddie) loan limit for a given county.
For most of the LA basin and the SF Bay Area that limit is now $970,800.
For Texas, that limit is now $647,200.
Here is an excellent map that sets out the conforming loan limits for the entire country by county.
High Balance For Jumbo?
Some jumbo investors (who buy our loans) will buy “high balance conforming loan amounts” as jumbo loans, but our best jumbo lenders will not, unfortunately.
Why Are Jumbo Rates So Much Lower?
I blogged about this in April, and recommend skimming it again.
Here are some of the reasons why jumbo investors offer such low rates:
- Qualifying is much more difficult, making the loans less risky;
- There are no “G-Fees” or extra fees that Fannie and Freddie charge that make their rates higher;
- Jumbo appraisal rules are much stricter, again making the loans less risky;
- The investors that buy jumbo loans are desperate for secure yields in this economy and offer very low rates to get those yields; and
- Some “big bank” investors offer low rates that make them no money because they hope to establish banking relationships with the borrower.
What Does “Harder To Qualify For” Mean?
- Down Payments: Our best jumbo investors demand 20% down at least. Fannie and Freddie will take 5% down.
- Debt to Income Ratios: Our best jumbo will not go over 43%. Fannie and Freddie will go to almost 50%!
- Credit: Jumbo gives the best rate for an 800 score; Fannie and Freddie’s best rate comes with only a 740 score.
- Reserves: Reserves are the cash remaining in a borrower’s accounts after a transaction is closed. Our best jumbo lenders require 12 months of housing payments in the form of reserves. Fannie and Freddie require none.
Mortgage Banks Hate Jumbo
As I pointed out in this recent blog, mortgage banks hate jumbo because:
- Jumbo loans are much riskier for them in general;
- Jumbo loans are far more work (often 10x more work than a conforming loan); and
- Jumbo loans are much less profitable.
Jumbo also takes more time to close (25 days for jumbo vs. 14 days for conforming and FHA).
Go For Jumbo!
Strong borrowers who qualify for jumbo in any way, and who do not need to close in 14 days, should always shoot for jumbo financing.
Yes, we make less money and yes it takes us far more work, but we are always willing to do what is best for our clients.
And getting a 3/4% lower rate, for very strong borrowers, is definitely what’s best for clients. 😊
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167