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Jack M. Guttentag The Mortgage Professor

Jack M. Guttentag, The Mortgage Professor

Where to Go for a Jumbo Loan

by Jack M. Guttentag

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Posted on Tuesday, November 25, 2008, 12:00AM

During the period of May 4, 2007 to Nov. 7, 2008, the spread in wholesale interest rates between a $417,000 loan eligible for purchase by Fannie Mae and Freddie Mac and an ineligible $418,000 loan increased from 0.28 percent to 2.97 percent.

Loans eligible for purchase by the agencies are called "conforming loans." Loans larger than $417,000 are called "jumbos," and borrowers who need one today face a perplexing array of choices.

Giant-Size Rules

Until July 1, 2008, the agencies couldn't purchase jumbos. However, as the private secondary market in jumbos deteriorated in late 2007 and early 2008, Congress passed the Economic Stimulus Act of 2008 in February.

Among other things, that bill authorized the agencies to purchase jumbos in high-cost areas. The allowable size of jumbos on single-family properties can range up to $729,750, depending on house prices in the county in which the property is located. This authorization for the purchase of jumbos lapses after Dec. 31, 2008.

To complicate matters further, in July, the Housing and Economic Recovery Act of 2008 set permanent jumbo size limits that will kick in beginning January 2009, provided the current limits are not extended. The permanent limits are similar but lower, with a maximum of $625,500. (You can find the jumbo size limits for the balance of 2008 here. Counties in which jumbos aren't authorized don't appear.)

Pricing a Jumbo

Contrary to what Congress evidently expected, conforming jumbos are not priced the same as conforming loans of $417,000 or less. On Nov. 7, 2008, when the wholesale rate on a conforming $417,000 loan was 5.76 percent, the rate on a conforming $418,000 loan was 6.33 percent. This was far better than the 8.73 percent on a non-conforming $418,000 loan, but why is there any difference at all?

Part of the reason is that the agencies are charging more on jumbos, presumably because they're more costly to process, more risky, or both. A second reason is that the secondary market is treating jumbos as a special category of loan that may not be marketable through the efficient TBA ("to be announced") pooling process.

A TBA pool is the collateral for a mortgage-backed security that is priced and traded before the security is issued. Jumbos can only comprise 10 percent of the mortgages in a TBA pool, which allegedly lowers the price investors will pay for it. This treatment of jumbos might be temporary.

Categorizing Your Loan

Given the current state of the market, borrowers today should place themselves in one of three groups.

If you need a loan of less than $417,000, using a mortgage bank or mortgage broker will assure that your loan will end up with one of the agencies, and that your loan provider will have access to the best prices available. You remain vulnerable to excessive markups, however, which is why I recommend Upfront Mortgage Brokers (UMBs) if you need handholding, and Upfront Mortgage Lenders (UMLs) if you want to control the process on the Internet.

If you can't meet the agencies' credit, documentation, and other requirements, you may still qualify for an FHA loan. Some of the UMBs and UMLs offer FHAs, and other FHA lenders can be found here.

Finally, if you need a loan that's larger than the agencies' current jumbo limit in the county in which a property is located, the best option is to shop depository lenders -- commercial banks, savings and loan associations, and credit unions. This can be quite a challenge, however, because of the wide disparity in prices among the institutions.

Evidence of Turmoil

On Nov 12, I shopped for an $800,000, 30-year fixed-rate mortgage on Mortgage Marvel, an online site that I reviewed a month or so ago.

The mortgage companies on the site quoted rates of 8.125 percent to 8.375 percent. The credit unions and banks, in contrast, quoted rates ranging from 5.875 percent to 7.875 percent.

I've never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.

Final Thoughts on Jumbo Loans

If you qualify for a conforming jumbo, meaning that you need a loan larger than $417,000 but no larger than the jumbo limit for the county in which a property is located, you'd probably do best following the procedure described above for a $417,000 conforming loan.

Since you'll be paying a significant premium over the price of a $417,000 conforming loan, however, you might also check out depository sources. You also need to be mindful that the current jumbo size limits are good only to year-end unless Congress extends them. Otherwise, they'll be replaced by the lower permanent limits.

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95 Comments

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  • Jared - Monday, December 1, 2008, 11:55AM ET  Report Abuse

    • Overall: 1/5

    Nowhere in this article "Where to go for a Jumbo Loan" does it tell you where to go for a jumbo loan.

  • Yahoo! Finance User - Sunday, November 30, 2008, 7:19PM ET  Report Abuse

    • Overall: 4/5

    Why on earth do many of these commentators think that no one should get a jumbo? They must live in Podunk BFE in a sprawling 1000 sq ft ranch worth $100,000. The rest of us live in markets where we generally don't control the price of housing. I would love to pay less than $417,000 for a house in my town. But I don't feel like cramming my family into a tiny rat hole in the middle of nowhere. I CHOSE to purchase my house at the price I paid, which is in an excellent school district and near the beach (let's just say its significantly more than $417K). And guess what? I can actually afford the house payments, along with saving for retirement and the kids college. That's because my wife and I got good educations, are careful with our money, have stellar credit, and work hard. Don't cast everyone as irresponsible. And if I ever lose my house, its no skin off your backs!

  • danno - Friday, November 28, 2008, 10:34AM ET  Report Abuse

    • Overall: 2/5

    Mortgage Marvel's data is outdated! There was a big rate drop Tue morning. When I searched for a 695k jumbo conforming loan (under 2008 limits), it failed to reflect the lower rates. This was confirmed when I went to some of the listed lender sites. It's possible that the credit unions are failing to properly send updated rates to Mortgage Marvel. Please be aware that most mortage comparison sites are a game of liar's poker. Often, rates posted on these sites are much lower than the current market and the broker/lenders are hoping to suck you in, then hope that market rates drop to that level during the processing of the loan. Credit unions tend to be an fairly honest in their postings. I'm in the mortgage business myself. Use an UMB or one who is trustworthy and does play the lowball/bait-and-switch rate quote game on these sites. The pricing of a mortgage loan is a complex process and is dependent on the invididual borrower's scenario.

  • Yahoo! Finance User - Friday, November 28, 2008, 8:30AM ET  Report Abuse

    • Overall: 1/5

    Imbecile. If you want or need a Jumbo Loan just go to a credit union. If you are credit worthy they will make you a jumbo loan. Credit unions have made Jumbo Loans all along through good and bad times because they don't need to sell them, they don't trade paper. Credit Unions do what banks used to do; they make good solid credit worthy loans and keep them because they are good investments. The ignorance of Yahoo "Experts" is astounding. They all have either a personal agenda to sell their lousy books or are plugging a business or group and they must all work for the banks.

  • Yahoo! Finance User - Thursday, November 27, 2008, 10:26AM ET  Report Abuse

    • Overall: 1/5

    Agree with last poster. Also, why not call a jumbo loan a G417 (greater than $417,000)? What's with all the "mortgage speak"? Yes, it is knit-picking, but a complete overhaul has to start at the start. That is just one of the numerous reasons why we are in this debacle.

  • Yahoo! Finance User - Thursday, November 27, 2008, 9:38AM ET  Report Abuse

    • Overall: 3/5

    Crazy. If you need to borrow that much for a home, you shouldn't be buying that much of a home. Isn't that how we got into this mess??? 30k a year millionares????

  • Jack - Thursday, November 27, 2008, 6:47AM ET  Report Abuse

    • Overall: 3/5

    Jumbo loans are very easy to get these days. Just call King Henry and Gentle Ben. They will RESCUE you and STABILIZE you and JUMBOLIZE you. Call today, no down payment required, no income required, all debt levels accepted.

  • dtifft - Thursday, November 27, 2008, 2:25AM ET  Report Abuse

    • Overall: 1/5

    I'm a famous movie star, who is married to an international financier. You may not have ever heard of me, but I currently need a $1,600,000 loan down payment right away. Can anyone help us, please?

  • low country man - Wednesday, November 26, 2008, 11:33PM ET  Report Abuse

    • Overall: 5/5

    Speaking about the true of our current mortgage market from a honest and realistic point of view of whats happening out there is not a sign of weakness or ignorance., nor does it make you a " chicken ". Shop around before making any important decision, and using good conscious and judgment get on the market it is good time to do it for those that have eagle eyes.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 10:56PM ET  Report Abuse

    • Overall: 3/5

    One solution to the $417,000 conforming loan limit is to do what I did earlier this year. Did a first at $417K (6% fixed) and a second (HELOC variable) for the balance, all at the same time. The interest rate on the HELOC is currently lower (4%) than my fixed, as it is tied to the prime rate. The rate on the HELOC can eventually be above my fixed, but I don't see that happening for a few years. Of course it helped to have a 10% plus down payment and an excellent credit history. Also, by shifting a portion of the purchase price to the HELOC, I was also able to avoid PMI as this reduce the amount of the first to less then 80% of the purchase price.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 10:44PM ET  Report Abuse

    • Overall: 5/5

    its getting hard to find jumbo shrimp also

  • Yahoo! Finance User - Wednesday, November 26, 2008, 9:08PM ET  Report Abuse

    • Overall: 3/5

    Wow, what a bunch of psychos you commenters are. This bear market has really killed any sense of hope in you, hasn't it? Please keep selling your shares of blue chip companies to me at amazing discounts, and please keep giving me real estate deals which have returns upwards of 40% annually... The funny thing is, by looking at short term success, you brand investors the "suckers" for staying in when you have absolutely no idea how much you're missing out on by being such chicken littles. So go ahead, keep on panicking. I'll pick up your pieces, thank you very much.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 7:57PM ET  Report Abuse

    • Overall: 5/5

    Good article for people who need a jumbo loan. I know that sounds like a lot of money to people living in Flatbed, Missouri or to people who will never be able to afford a home, even in Flatbed, MO, but houses can actually be priced correctly and still at or above the jumbo limit.

  • Richard - Wednesday, November 26, 2008, 7:51PM ET  Report Abuse

    • Overall: 5/5

    This gives great perspective for high cost areas such as California. Also, Morgage Marvel is a good resource for shopping

  • Yahoo! Finance User - Wednesday, November 26, 2008, 7:08PM ET  Report Abuse

    • Overall: 1/5

    Don't take out a jumbo loan for your McMansion. Very bad idea. This economy will not rebound. Furthermore, oil prices will not stay low for too long. But don't listen to me, Ben and Jack are the experts.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 5:10PM ET  Report Abuse

    • Overall: 4/5

    For those of us in high-priced housing areas, this article provides some useful information and perspective.

  • Christopher - Wednesday, November 26, 2008, 4:37PM ET  Report Abuse

    • Overall: 2/5

    Here's a thought: how about we all start living within our means and create a nation in which home ownership doesn't require a ridiculously-sized mortgage? Have we not learned anything in the past two years?

  • Yahoo! Finance User - Wednesday, November 26, 2008, 4:20PM ET  Report Abuse

    • Overall: 1/5

    Tune in again next week when good old Jack shows you how to buy a new Kia Rio with no money down & payments out to 72 months.

  • NigelD - Wednesday, November 26, 2008, 3:38PM ET  Report Abuse

    • Overall: 5/5

    As a holder of a Jumbo Conforming Loan, I am very interested in what the Feds do. It could mean re-financing at a better interest rate and/or paying down the loan to make it $417k conforming. Renting always means throwing money down a hole for a period of time. A year of renting is the same as increasing / decreasing a potential house value by ~$12,000. That is 2% of 417. If you don't have the down payment go back to scratching your balls.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 3:15PM ET  Report Abuse

    • Overall: 5/5

    Jack's right. My wholesale sources have already implemented 2008 loan limits on Agency Jumbo loans to $546,250 down from $697,000 for San Diego. When Agency Jumbos came on the market the spread between conforming and jumbo was ridiculous. Today, I can fund an Agency Jumbo for only .125% difference due to falling mortgage rates. Good article Jack.

  • Kl - Wednesday, November 26, 2008, 2:34PM ET  Report Abuse

    • Overall: 5/5

    good article. for the dumb-dumbs on this blog who say getting a loan to purchase a house is a bad idea are not very well informed. if one can afford a house, this is a great time. buffet said "be greedy when others are fearful". that said, i recently tried to buy a house and everything in the article is correct about the jumbo loan process.

  • vic_laszlo - Wednesday, November 26, 2008, 12:37PM ET  Report Abuse

    • Overall: 5/5

    I can't believe how many people missed the point of this article. There are numerous areas across the United States where you can not purchase a home for less than $417,000. The people on this board who are arguing about how "dumb" it is to get a "jumbo loan" apparently don't live in these areas and don't realize this. Also, the people who think that the article is untimely apparently did not read the article. This article is not about how Congress raised the limits for the loans that Freddie and Fannie could purchase five months ago. This article is about the current state of interest rates for the three different types of loans (i.e., loans under $417,000, loans over $417,000 that Fannie/Freddie can purchase, and loans over $417,000 that Fannie/Freddie cannot purchase). It was unclear what the interest rates for these different types of loans would be when Congress raised the limits. This article provides some information on what those interest rates are. Thus, it is entirely timely. Some of these posters should work on their reading comprehension skills before criticizing the author.

  • Caylin - Wednesday, November 26, 2008, 12:05PM ET  Report Abuse

    • Overall: 1/5

    Ok for all of you claiming he is just heaping more trouble on our financial turmoil by suggesting consumers buy more than they can afford, try reading again. He is simply offering information about jumbo loans. Jumbo loans are not good or bad, they are just loans. As for Jack himself he is USELESS. I hope Yahoo is not paying him by the word, if so they got a raw deal. This article promises to guide you to where you can find jumbo loans. Instead, it simply drops a lot of needless, dated, half-correct, and confusing information on to the web. It is time for Jack to retire. Last time it was a "great time" for hard money lenders, in the most illiquid and restrictive lending environment in our history. I'm sure there are lines of hard money lenders at the Mercedes dealership with all of their profts. Now we get a whole lot of information about the types of Jumbo loans that for the most part are not being made available or are so restrictive that only premier borrowers can qualify for them. I have a hunch they know where to go for their mortgages. Please Jack, do something useful...be quiet.

  • CB44 - Wednesday, November 26, 2008, 11:13AM ET  Report Abuse

    • Overall: 1/5

    Ummm, Congress raised the limit on Jumbo loans to $725,000 a few months ago. What is this guy talking about. And in some places you don't have a choice but to get a jumbo because the good house are still over $800,000 (major cities and their suburbs) But the fact that the limit was raised makes the article moot.

  • John - Wednesday, November 26, 2008, 11:07AM ET  Report Abuse

    • Overall: 2/5

    Anyone contemplating a "jumbo" loan for real estate should probably have their head examined. Real estate is still extremely overpriced in many parts of the country, and many sellers are still delusional. I look at the ads once in a while for a good laugh, but that's about it. I'll come back in a few years when prices will be at 1998 levels or lower. Don't be a sucker.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 10:50AM ET  Report Abuse

    • Overall: 5/5

    Simple explanation of the rules. He was not suggesting that you borrow more than you can afford, only providing information concerning borrowing. The article provided what it promised.

  • Gehrin O - Wednesday, November 26, 2008, 10:49AM ET  Report Abuse

    • Overall: 3/5

    This article is not telling the american public to buy real estate. It is simply stating the facts on the spread in interest rates and how much more difficult it has gotten to obtain a jumbo loan. The fact of the matter is that everyone that needs a purchase jumbo loan right now must be able to afford it since lenders now require full income documentation. The borrowers in need of jumbo loans refinance loans are in more trouble as they are stuck in the type of loan they are currently in and combined with more stringent lending and declining house values there is not much they can do but wait. There must be credit available for those that qualify for it and really no one else. That is how we have gotten into the trouble we are in now. If you want to buy any item on credit in this country you must be able to afford it, but we are build on a society of credit and put a band-aid over the problem and we will worry about the consequences later. We will see how this all plays out in the near future.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 10:48AM ET  Report Abuse

    • Overall: 5/5

    Can't stand reading all this Yahoo CRAP anymore? Check out: http://www.clearspeak.wordpress.com

  • d - Wednesday, November 26, 2008, 10:47AM ET  Report Abuse

    • Overall: 1/5

    What's there to say that hasn't been said before me.... falling prices, buying more than you can afford, losing jobs, etc. This information is about as safe as holding a rattlesnake by the tail and slapping it around. Hopefully, though, those that think they can use this information will still get turned down for a Jumbo and good old Jack will not have helped add to this current mess more than he probably already has. There should be some sort of mal-practice charge can be brough against people like him spouting off dangerous stuff like this in public forums.

  • Yahoo! Finance User - Wednesday, November 26, 2008, 10:39AM ET  Report Abuse

    • Overall: 3/5

    I bet Jack is known to all of his friends for being very timely... And also for providing endless amounts of useless information.

Showing comments 6-35 of 95<< PreviousNext >>

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