Jumbo Mortgages Proliferate, but Still Hard to Get

It seems mortgages are no longer just for regular folks. So-called Jumbo Loans have witnessed a surge in popularity over the last decade, thanks to the same explosion in easy credit that also made conforming loans easier to get. Still, these loans are relatively rare, especially in the current lending environment.

Before I go any further, I want to clarify the distinction between conforming and jumbo mortgages. The distinction is made solely in regards to loan size, for no other reason than loans above a certain (some would say arbitrary) threshold are considered more risky. The exact thresholds vary by region, in accordance with local housing price levels. In the majority of cases, the limit for a conforming mortgage is $417,000, while in Los Angeles, for example, it’s $729,750. Anything above must be financed using a jumbo mortgage.

You should be aware of this distinction when shopping for a home. If possible, you should plan/negotiate to purchase a home below the cutoff, in order to make the financing process easier, as I’m about to explain. The first thing you will notice when shopping for a jumbo loan is that they are mostly adjustable rate loans. When interest rates are low (as they are currently), that can work to your advantage. When they rise, however, this will make your already expensive mortgage even more expensive. Second, down-payment standards are more rigid; in order to obtain a jumbo mortgage, you should be prepared to contribute at put down at least 20% in equity. Compare this to the 3.5% that is required with FHA conforming mortgages.

In addition, lending standards for jumbo loans are generally more strict. You will most likely be rejected if your projected monthly mortgage payment exceeds 38% of your income. Your credit history should be stellar, and you will be required to thoroughly document your income and assets when applying. Those who were hoping to obtain a Liar’s Loan need not apply. Finally, mortgage interest on jumbo loans can only be deducted on the first $1.1 million (recently revised by the IRS from $1 million). I shouldn’t broadcast this, but tax experts have found ways to get around this, usually by pooling mortgage interest with other investments.

While precise figures on jumbo mortgage lending are hard to come by, it seems there are 130,000 currently outstanding mortgages with loan balances of more than $1 million. 3,000 of these loans have balances of more than $3 million, and a handful over $20 million. Interestingly,these mortgages are plagued by the same rates of default as effect conforming mortgages. At the end of the day, I guess the super-rich are just as prone to poor financial decision making as the rest of us…