Jumbo loan rates are very close to conforming loan rates in many markets, making bigger, more expensive homes more affordable while allowing buyers to stay within their budget.

"In the past, some buyers may have tapped into personal savings to come up with a larger down payment in order to avoid jumbo pricing," says Diana Gleason, Los Angeles regional sales executive for Bank of America. "When jumbo rates are so similar to conforming rates, buyers may find jumbo loans to be cost effective."

Recent interest rates on a 30-year fixed conforming loan were 4.25 percent, and a 30-year fixed FHA loan was at 4.125 percent. A 30-year fixed jumbo loan was 4.125 percent.

Qualifying for a jumbo loan isn't as easy as picking the terms. Jumbo loans often require lower debt-to-income ratios, higher credit scores, larger down payments, and more emergency funds (often called reserves) than conforming loans, Gleason says.

Jumbo loans traditionally have higher interest rates than conforming loans, she says. In today's market, however, the rates are fairly comparable, and sometimes jumbo loans are lower.

What is a jumbo loan?

If you're looking at homes that are more expensive for the area you're shopping in, then you might need a jumbo loan.

If the loan for a single-family home is for more than $417,000 -- or $625,500 in Hawaii and Alaska -- then it exceeds the conforming loan limit set by Fannie Mae and Freddie Mac, the government-affiliated agencies that market mortgages in the United States. Anything less than those amounts is considered a conventional loan.

Once you go over that limit, the loan can either be a jumbo loan or high balance loan. A high balance loan goes up to the Fannie Mae loan limit for the county where the home is. If the home is in one of those federally designated high-priced markets, then you can get a high balance loan. These have stricter underwriting requirements than conforming loans, but are generally priced lower than jumbo loans. The county limits vary, so search for what the limit is in your area.

For example, San Diego has a county limit of $526,750 for a high balance Fannie Mae loan, which is above the conforming loan limits but below jumbo loans, says Travis Saling, a loan officer at Team Home Loans in San Diego, Calif. If you're applying for a loan between the $717,000 limit for conforming loans and $526,750 limit for a one-unit home, then a high balance loan would be use instead of a jumbo loan.

If the home costs more than the county limit -- $526,750 in this case -- then you'd need a jumbo loan. These require higher FICO scores, more equity in the property, and larger cash reserves.

Other options

Before buying a high-priced home, it can be worthwhile to talk with your lender about a combination loan where a second, smaller mortgage is taken out at the same time as the first mortgage. The first, larger mortgage conforms to the loan limit, allowing you to avoid some of the increased requirements and possibly higher rates on a jumbo.

The interest rate on the second mortgage is typically higher, and you'll have two mortgage payments due each month.

Another option is to increase your down payment on the high-priced home so that you can borrow less money.

How to qualify for a jumbo loan

As mentioned above, you'll need more money, lower debt and better credit scores to qualify for a jumbo loan.

While credit score requirements differ by banks, typically a 720-740 credit score is needed for a jumbo loan, Saling says. There can be quite a difference between the jumbo loan terms for someone with a 720 score and someone with a 700 credit score, he says.

For someone seeking a jumbo loan of up to $1 million and 20 percent down, a 700 score would require having 12 months of reserves: principal, interest, taxes and insurance for the home, Saling says. Someone with a 720 credit score would only need nine months of reserves, he says.

For a mortgage of up to $2 million, a jumbo loan would require 30 percent down, though the reserve timeline would stay the same, Saling says.

"Seven hundred (credit score) is really low, poor credit," he says. "Most jumbo customers are at 800."

Jumbo loans also require lower debt-to-income ratios of 40 percent, compared to 45 percent for conventional loans, Saling says. Some lenders allow the ratio to be as high as 50 percent for loans of $417,000 or less, he says.

Why jumbo loans can cost more

For now, jumbo loan rates are comparable to conventional loans. Typically, however, they're higher because lenders can't sell jumbo loans to professional investors as easily as they can the loans backed by Fannie and Freddie.

"The worst thing that a company can do is fund a loan and then not be able to sell it," Saling says.

To conform to Fannie Mae and Freddie Mac standards, there are what's called conforming jumbo loans. They're above the $417,000 conforming loan limit, but under the county limit in areas deemed high-priced by the federal government. A lower credit score of around 660 is needed to get the loan, Saling says.

There's also a "Fannie Mae jumbo high balance" loan that requires only 10 percent down and doesn't have a reserve requirement, he says, though the interest rate is typically .25 percent higher than a conventional loan.

Last fall Bank of America started a new jumbo mortgage option where qualified buyers can secure a non-conforming jumbo loan for amounts under $1 million with a 15 percent down payment instead of the 20 percent normally required, and without paying mortgage insurance, Gleason says. First-time homebuyers and investment properties aren't eligible for the option, which isn't available in certain states and markets.

Why banks want your jumbo business

With jumbo loans currently at or less than conforming loans, they're a good way for banks to get high-income customers in door to sell them business banking accounts, checking, savings accounts, life insurance and other services, Saling says.

"Whatever they're selling, they can try to get them to open checking accounts and all sorts of stuff," he says.

A customer with an 800 credit score is a good investment for a bank, he says.

Jumbo loans also don't require banks to follow Fannie Mae guidelines, for example, on a loan that can never be sold. A jumbo loan gives a bank a chance to lock up $1.5 million, for example, at 4 percent interest, for 30 years.

Published on May 22, 2014