Most consumers don't understand what the rationale is behind a jumbo loan vs. conventional mortgage financing. A conventional loan refers to a mortgage that can be sold and securitized through Fannie Mae or Freddie Mac. These two agencies were originally established as government sponsored agencies, or GSA. A GSA is a privately, or publicly (stock ownership as is the case with FNMA and FHLMC) owned entity which has the implicit backing of the US Government. Nothing could be more clearly illustrated than when FNMA and FHLMC became insolvent during the mortgage crisis and the government stepped in and took them over. As GSA, FNMA and FHLMC are able to package mortgages into securities and sell them to investors on Wall Street. The rate of return demanded by investors is lower than other securities such as corporate bonds. Said another way, investors are willing to accept a lower rate so long as that security is insured or backed by the US government. Fannie and Freddie establish annually the maximum mortgage amount that can be sold and securitized, $424,100 in 2017 (the limit is more in high-end real estate markets such as San Francisco).
So what's a would be home-buyer to do when looking to for a mortgage above the Fannie and Freddie limit; this is where jumbo mortgage financing steps in. The process of applying for a jumbo mortgage is no different than conventional financing and are widely offered through mortgage bankers, banks, and mortgage brokers. The difference comes in after your loan is sold by your mortgage lender. Rather then packaging and selling your mortgage to FNMA or FHLMC, your loan will be sold to a private investor, typically a pension fund, commercial bank, or Wall Street investment house. Local community banks also offer jumbo mortgage which is funded by their bank deposits and held in their loan portfolio.
What does all of this mean to you....the lending requirements are typically more conservative than conventional mortgage financing. You will find the down payment requirements, credit score and history, and debt to income ratios are more restrictive than conventional mortgage guidelines. Also, because these loans don't have the implicit backing of the US Government, investors will demand a higher rate of return, this translates into the interest rate typically being higher on a jumbo mortgage loan.
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