Real estate is obscenely expensive these days: The median home price nationwide in April 2018 was $312,000, which is an eye-watering 50 percent increase over the past 10 years. But if you live in or around a city like New York, San Francisco, Boston, Seattle or basically anywhere in Southern California between the desert and the ocean, you know home prices are stupid high: San Francisco’s median — median! — home price is now $1.61 million.
The baseline loan limits set forth by the Federal Housing Finance Agency (FHFA) is $453,100 for most U.S. counties, but in the more expensive housing markets, that won’t buy you much more than a front door and a porch light. Because of this, the FHFA makes exceptions for certain markets: A “high-balance” limit (that varies by county) of $649,750. That’s better — now we’re talking a bedroom and possibly a kitchen — but still way out-of-whack.
Most people in those markets obviously need to borrow way more than that, and that’s where so-called jumbo loans come in — “nonconforming” loans offered by mortgage companies that are simply higher than the FHFA threshold. But what do they mean for you, a borrower? And why are they even considered “jumbo” in markets where real estate prices are on a whole different level to start with? Working alongside Kevin Scanlon, a loan officer at CMG Mortgage in San Diego (the 10th most expensive-as-hell real estate market in the country), we’re going to try and make some sense of it.
Okay, so what’s the difference between a jumbo mortgage vs. a regular mortgage?
Banks are, basically, free to lend however much money they want. But the thing about a loan above the FHFA limit is that they can’t then be resold to Fannie Mae and Freddie Mac (the government institutions set up to provide stability and affordability to the housing market, both of which actually fund most home loans). This means the lender will either be holding onto the loan or reselling it to a non-government buyer, and in that case, the lender can set its own underwriting rules for a jumbo loan.
What kind of rules?
They’re mostly to do with the loan’s guidelines, i.e., the things it takes to get the loan: Minimum credit score; loan-to-value ratio; whether it’ll be your primary residence/vacation home/investment property; reserve amounts you need to have in the bank, etc. But don’t assume that a jumbo loan always means stricter requirements. “In some cases, guidelines can be more flexible than conforming guidelines, while in other cases, they can be more restrictive,” says Scanlon.
How might they be less restrictive?
In some cases, a buyer could qualify for a jumbo loan that they wouldn’t qualify for with a conforming loan and their many rules. An example could be a foreign national, who wouldn’t qualify for a conforming loan. Or more creative loan terms might be possible, like cross-collateralization, where you can reduce your down payment if you put up another property as collateral on the loan. But since jumbo loans obviously involve borrowing more money, and the lender tends to take on more responsibility for the loan, they can also be more restrictive.
How so?
Again, lenders may want you to have a higher credit score, or more money in the bank, or a larger income in order to qualify.
So do jumbo mortgages cost more?
Well, aside from the fact that you’re borrowing more, yeah, they do. “In general, the interest rate on jumbo loans will be a bit higher,” Scanlon says. Of course, putting more money toward the down payment, if you’re able, can lower your interest rate.
Aside from possibly getting less restrictive terms, is there anything good about them?
Again, since the lender makes its own rules, you could possibly structure it in ways that you couldn’t get on conforming loans. Scanlon shares examples like an interest-only loan, or a longer loan term (say, 40 years, rather than the maximum 30 years for a conforming loan). These types of things, he points out, can make payments on a jumbo loan more affordable.
So what’s the catch?
There’s no catch as such, besides possibly ending up with a higher interest rate or stricter guidelines. Basically, it’s just a larger loan. As with any mortgage, don’t forget the sage advice of caveat emptor (bearing in mind that it was predatory lenders and careless borrowers who basically brought our civilization to the brink of economic oblivion in 2008). Don’t get in over your head, or let anyone talk you into it.
So does that FHFA conforming limit ever change? It seems nuts for the millions of people who live around big cities to view $600,000 or so as a “jumbo” loan when it won’t even get you a studio apartment.
Yes — in fact, it changes annually. The baseline limit for most places was $424,100 last year, so it increased $29,000 in a year. It may not accelerate as quickly as the most expensive markets do, but it does increase every year.
But you’re correct: For those in expensive housing markets, it’s not keeping pace with current needs. The reason is that the high-balance limit, just like the baseline limit, is based on national home sales prices. High-balance places are cities where the median home value is 115 percent of the baseline loan limit, and by law, the FHFA sets the high-balance limit at 150 percent of the baseline limit — it’s all math, you see. So even though the hottest real estate markets far outpace the rest of the nation in appreciation, the high-balance limit is tethered to nationwide numbers. Which is a remarkably unhelpful way to do things if you live in or near a big city, but that’s the way it is right now.
How big can a jumbo loan get, anyway?
Ask Jay-Z: Last summer, he and Beyonce secured a $52.8 million loan to buy their home in LA (since you no doubt were wondering, they paid $88 million for the place). That is, obviously, a jumbo loan. See? Even billionaires finance stuff like the rest of us, only with slightly less crippling anxiety about whether they’ll ever be able to pay it back.
Adam Elder
Adam Elder is a writer in San Diego. He's also written for Esquire and WIRED magazines, VICE, The New York Times, The Wall Street Journal, The Guardian, newyorker.com and elsewhere.
