Jumbo Mortgages - Why Are They So Much Less Profitable?

Mid adult couple listening to financial advisor. They are receiving good news about their jumbo loan. They are sitting in an office and having a conversation.

We are great at funding jumbo loans – which is a blessing and a curse.

“Jumbo loans” are any loans that exceed conforming (Fannie/Freddie) loan limits for a given area.

Our jumbo skill is a blessing b/c it enables us to service our many jumbo clients and maintain relationships with our many agent partners in high-cost areas.

Our jumbo skill is a curse though b/c jumbo loans are far more work and far less profitable.

We make much more money from a $500,000 conforming loan than we ever could from a $1 million jumbo loan.

Do we still want jumbo loans? Heck yeah!!

They are still profitable and we love helping out both referral partners and jumbo borrowers.

The purpose of this blog is simply to explain why jumbo loans are less profitable than much smaller conforming loans.

JUMBO LOANS ARE TOUGHER FOR MANY REASONS – INCLUDING:

Stricter Guidelines: The guidelines are much stricter with respect to asset, down payment, credit and debt ratio requirements.
Far More Labor: It takes far longer to pre-approve, process and underwrite jumbo loans. A clean conforming loan can take as little as two hours to originate, pre-approve and fund, while a tough jumbo loan can easily take as much as 20 man-hours to go from origination to funding.
Unforeseeable Problems: Problems pop up all the time – such as appraisal, asset verification, or credit issues – which take additional time to correct. This is b/c many of the problems that surface are impossible to foresee during the pre-approval phase b/c of how nebulous jumbo guidelines are and/or b/c of how often jumbo investors change guidelines (especially as a result of COVID).
Appraisals Are Far Tougher: There are no “appraisal waivers” on the jumbo front, and we almost always need a formal appraisal review or a 2nd appraisal. Many jumbo properties are just much tougher to appraise in general too b/c they involve exceptionally large dwellings, multiple units, large acreages or b/c there are just not enough similarly priced comparable sales.
Less Profitable: It is true that lenders make money in the form of “rebate” or “yield premium” that is based on loan size, lenders still make far more money from conforming loans, despite their smaller size, b/c the rebate or yield premium is much more with conforming loans. I won’t go into details but we make thousands of dollars more on a $500,000 loan (that takes much less work) than we ever could on a $1 million jumbo loan, as mentioned above. When we also factor in the extra labor jumbo loans require, they are even less profitable.
Take Longer to Sell: As I mention often, lenders make no money on the loans they fund until they sell them on the secondary market. And it takes us two to three times longer to sell our jumbo loans, for a variety of reasons. This is all too “inside baseball” to discuss in detail, but suffice it say that it hurts our cash flow and profitability much more than someone outside the industry might expect.