What is a 30-year fixed jumbo mortgage?
Mortgage loans mainly fall into two broad categories—conforming and non-conforming. Non-conforming loans are also known as jumbo mortgages. They are considered non-conforming because they exceed institutionally-enforced lending limits.
The government entities that enforce these limits are Fannie Mae and Freddie Mac. These two companies purchase most mortgages from lenders, but only if they conform to their loan limits and several other conditions.
30-Year Fixed Jumbo Loan | Quick Facts
- Require higher credit scores compared to conforming loans
- Ideal for expensive homes requiring loans that exceed Fannie Mae and Freddy Mac limits
- Interest rates may be higher compared to conforming loans
- Typically require multiple appraisals
- More difficult to qualify for; longer approval process
Features of a 30-year fixed-rate jumbo mortgage
A 30-year fixed jumbo mortgage is a home loan with a fixed interest rate payable in monthly increments over a 30 year period. The amount of a jumbo loan exceeds limits set by Fannie Mae and Freddy Mac. In most of the U.S. the limit is $484, 350 for a single-family home.
Because jumbo mortgages represent more risk for the lender, it is more difficult to qualify. Most jumbo loans require 20% down and a strong credit history. Additionally, your monthly mortgage payment can’t exceed 36% (or somewhere very close to this) of your monthly pre-tax income.
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What are the drawbacks of a 30-year fixed-rate jumbo loan?
Interest rates on jumbo loans are often higher than on conventional loans, especially during a weak market. In some cases over 1% higher. However, because qualification standards on jumbo loans are more strict, interest rates can be lower, in particular during a strong market.
Lenders will often require two independent appraisals before approving a jumbo mortgage. Properties purchased with jumbo loans are often large and more customized than your average home. And as a result, they are more difficult to value. With multiple appraisals, the lender is better able to arrive at an objective value.
Greater risk for lenders
Lenders view jumbo loans are more risky not simply because the loan amount is greater, but also because these loans are used to buy expensive homes that can be difficult to resell. In the event of a default, the lender ends up with a property that may languish on the market. Moreover, during economic downturns, default rates for jumbo mortgages tend to be higher as compared to conforming loans.
Jumbo loans for high-priced communities
Certain areas of New Jersey feature homes with prices that exceed Fannie Mae and Freddie Mac limits. Many exclusive neighborhoods—Summit, Princeton, Essex Falls, Avon by the Sea, Beach Haven, Chatham, Franklin Lakes, Harvey Cedars, and Harding, among others—have home prices that start well above conventional loan limits. Even where those limits are higher to accommodate for elevated prices.
Rates improving for jumbo mortgages
During the 2007-2008 financial crisis, interest rates for jumbo mortgages rose sharply in a short amount of time. However, as reported by The Wall Street Journal, rates stabilized and started to decline within two years. By July 2010, they were at their lowest since 2003.
As lending standards became more stringent during the financial crisis, risk on jumbo loans greatly decreased. With an increase in applications, many major lenders started offering jumbo mortgages, often at rates comparable to conforming mortgages. To secure one, you’ll need exceptional credit, a low debt-to-income ratio, and well-verified income history.