Jumbo vs. Conventional Loans


Most people are aware that there are a couple of options out there in the mortgage market in terms of the types of loans you can pursue: a conforming loan or a jumbo loan.

Conforming loans are those loans associated with the governmental agencies Fannie Mae and Freddie Mac, and they are for loan limits of up to $417,000 in most markets, depending upon how expensive the market, to $625,000 and, in a couple of cases, even up to $729,500, for example in the Bay area. The jumbo loans are loans that do not have a resale option associated with them. The lenders who make those loans are not submitting those loans to the government for the governmental reimbursement. They are effectively going out there and making these jumbo loans, and they are keeping them on their balance sheets.

The jumbo loans have traditionally been at higher interest rates than the conventional loans, so a lot of people purchasing more expensive properties are going out there and they are making sure they stay under the jumbo limits by either taking second mortgages or figuring out a source of funds to bring themselves under those limits under the assumption that that conventional loan will be at lower interest rate. Which, again, has traditionally been true. But now it’s starting to flip and I think it’s an important thing to note for buyers who are out there in the jumbo range, who have assumed the jumbo product will not be preferable.

What’s going on is that the Fed has begun to signal that it will stop the buyback of debt that has been effectively infusing capital to the mortgage markets and depressing interest rates. So this has made the loans rates on conventional mortgages increase a bit. At the same time, the lenders on the jumbo side are these cash rich banks that have not been able to find enough alternatives in a relatively slow economy to put their capital to work. So they’ve got over $3 trillion in cash sitting around that they want to put to work and they want to lend it now to some of the high end borrowers.

Now, these high end borrowers have frankly been thought of as a riskier proposition for lenders. But, frankly, in today’s market, they are looking stronger to the banks than are some of the buyers for the less expensive properties. Secondly, in addition to wanting to deploy this capital, these lenders are viewing these jumbo loans as a means of establishing relationships with some of these high end borrowers. You get their mortgage business and then perhaps you can get their IRA, you can get their day to day banking business.

So it’s worth checking out. And the opportunity is there to possibly do as well on the jumbo side or better, as you would do on the conventional side.