Shopping for a Jumbo Loan? It's More Important Than Ever to Compare Rates

Homebuyers looking for jumbo loans need to compare rates carefully as there's substantial variation. Find out why.

Buyers looking for a home loan have been in luck in recent weeks, as mortgage rates have repeatedly hit record lows. But people who need a specific type of mortgage, called a jumbo loan, may need to shop around more than usual to get the lowest rate. Here's why.

Added challenges to secure lowest jumbo loan rates

Jumbo loans are mortgages that exceed the loan limits set by the Federal Housing Financing Agency (FHFA). The FHFA establishes maximum loan limits based on guidelines from Fannie Mae and Freddie Mac. These two government-sponsored entities buy mortgage loans from lenders and either hold them or repackage them for investors in the form of mortgage-backed securities.

Don't be put off by the technical jargon. Basically what it means is that the organizations that buy most of the mortgage loans in the country will only purchase loans up to a certain dollar amount. For 2020, that loan limit is $510,400 for single-family properties in most parts of the country and $765,600 for loans in certain more-expensive areas. If you're borrowing more than that, you'll need a jumbo loan.

Your lender won't be able to sell a jumbo loan to Fannie Mae and Freddie Mac. Instead, it has to keep the loan on the books or follow a different process to find investors to buy it. And right now, during the time of COVID-19, banks and investors aren't buying many jumbo loans.

What that means is that it's not easy to unload jumbo mortgages, so many lenders get stuck owning the loans they approve and fund. In turn, fewer lenders are willing to make these loans. The result, according to the Mortgage Banker Association's Credit Availability Index, is that consumers had 57% less access to jumbo loans this July compared with one year prior.

In addition, the lenders that make jumbo loans don't use the uniform guidelines issued by Fannie Mae and Freddie Mac. Instead, they set qualifying requirements and rates based on their own balance sheets. That's why there's a wide variation between interest rates from one lender to another. Many financial institutions offering jumbo loans aren't even trying to compete with the rates offered by competitors.

This has led to borrowers receiving wildly different rates from different lenders. In fact, pre-COVID, there'd rarely be more than a 0.1% difference in loan offers made to the same buyer by a group of qualifying lenders. But now the range could be 0.5% or more. And that can make a huge difference in monthly payments and total interest costs -- especially when shopping for a large mortgage.

What should homebuyers do?

Since jumbo loan rates can vary so much from one lender to another, those in the market for a large mortgage absolutely must shop around. In fact, while most would-be homebuyers should get quotes from around three different lenders, those looking for a jumbo loan may want to try five or more different mortgage providers to see who will offer the most competitive rate.

Buyers should also see if a bank they already do business with is more amenable to offering a loan. If you're looking for a jumbo loan, don't restrict your search -- consider credit unions, local banks, large national banks, and online lenders. Working with a mortgage broker may even make sense, as brokers can help connect you to wholesale lenders. And you can always ask your preferred lender to match the best rate you're offered, although there's no guarantee they'll do so.

While it takes a little more legwork, there are still opportunities for those looking for a jumbo mortgage to get an affordable loan -- you just need to put in the time to find jumbo loan rates that are competitive. It's worth the effort.