Conforming loans stay at or below the FHFA annual limit and are eligible for purchase by Fannie Mae and Freddie Mac. Jumbo loans exceed that limit and must be sold to private investors or held in portfolio. The conventional assumption is that jumbo rates are higher because they carry more risk and a smaller investor market. That assumption is not always correct.
How Conforming Loan Pricing Works
- ✦Conforming loans are priced off the agency mortgage-backed security (MBS) market, which is the most liquid mortgage market in the world
- ✦Fannie Mae and Freddie Mac buy these loans, guaranteeing principal and interest to MBS investors
- ✦The guarantee means investors accept a lower yield, which translates to lower mortgage rates for borrowers
- ✦Loan-level price adjustments (LLPAs) layered on top of base pricing can significantly increase the effective cost for borrowers with lower FICO scores or higher LTV ratios
How Jumbo Loan Pricing Works
- ✦Jumbo loans are priced off the demand from private investors, banks, and portfolio lenders who buy or hold them
- ✦No agency guarantee: investors take the full credit risk, which historically priced jumbo at a premium above conforming
- ✦Well-capitalized banks and credit unions often hold jumbo loans in portfolio, and their internal cost of funds drives pricing
- ✦During periods when banks have strong liquidity and want high-quality mortgage assets, jumbo rates can be priced competitively or below conforming rates
When Jumbo Beats Conforming
Jumbo rates have periodically fallen below conforming rates, particularly for high-credit borrowers with large down payments. This occurs when private investor demand for high-quality jumbo collateral is strong while conforming pricing is penalized by LLPAs for the broader credit pool. A borrower with a 760 FICO and 30% down on a $1 million purchase may be quoted a lower rate on a jumbo loan than on a conforming loan because the LLPA adjustments on conforming pricing reduce the rate advantage of the agency guarantee.
Practical Implications for MLOs
- ✦Always price both conforming and jumbo for loans near the conforming limit, especially for high-credit borrowers
- ✦High-balance conforming (above the standard limit in high-cost areas) carries its own pricing tier that should be compared against jumbo
- ✦For a loan 5% to 10% above the conforming limit, evaluate whether the borrower should bring additional down payment to get under the conforming limit or take the jumbo pricing
- ✦Jumbo pricing from lenders can be inconsistent: pull two or three quotes from lenders who actively originate jumbo in your market
Aria can compare conforming vs. high-balance vs. jumbo pricing for a specific loan amount and borrower profile and identify which structure produces the best total cost. Ask at vicariointel.com.
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