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Why Jumbo Mortgages Are More Expensive?

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A jumbo mortgage loan, also called a non-conforming loan, is a mortgage loan that is greater than $417,000. Mortgage loans for less than $417,000 are known as conforming loans, since these smaller loans conform to the guidelines set forth by Fannie Mae ( the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corporation). Freddie Mac and Fannie Mae are government-sponsored enterprises that purchase and securitize mortgage loans for the purpose of making funds available for homeowners to borrow.

Fannie Mae and Freddie Mac purchase and provide insurance for mortgage loans that are conforming loans, so mortgage lenders are more protected when they underwrite these mortgage loans. In contrast, Freddie Mac and Fannie Mae do not insure jumbo mortgage loans, and as a result, jumbo mortgage rates are higher than the interest rates associated with conforming loans. Mortgage lenders set jumbo mortgage rates at a higher level because these loans pose a greater risk to the mortgage lender who extends the loan.

There are a few exceptions to the $417,000 loan limit; since early 2008 and in certain high-priced home markets, Fannie Mae and Freddie Mac will purchase some loans that exceed the $417,000 mark. These exceptions are on a county-by-county basis, and each county is subject to a individual loan amount limit. These loans that are greater than the $417,000 conforming limit but below the county limit are often known as "super-conforming jumbo loans" or "agency-conforming jumbo loans."

Under the American Recovery and Reinvestment Act of 2009, the maximum loan limits in 2010 by county are equivalent to the maximum limits that were in effect for loans that were originated in 2009.

In addition to the higher jumbo mortgage rates, jumbo mortgage loans also tend to have stricter requirements for loan applicants as compared to the requirements for conforming loans. For example, most mortgage lenders require that an applicant for a jumbo loan have a higher credit score and provide a larger percentage of the purchase price as a down payment than the lender would require from an applicant for a conforming loan.

When shopping for a home mortgage loan, it is important to understand the implications of taking out a jumbo mortgage loan instead of a conforming mortgage loan. Besides paying the higher jumbo mortgage rates, it can be more difficult to find mortgage lenders who are willing to commit to mortgage loans at the jumbo loan level.