How to score a low rate on a jumbo mortgage during COVID-19

When you're buying a luxury home or house-hunting in a sizzling market, a regular mortgage just isn't going to cut it. You need to supersize.

Jumbo loans (yes, that is the formal term) are in dollar amounts too big to be guaranteed by the giant government-sponsored companies that back most mortgages in the U.S.

That makes jumbo loans riskier for lenders — and trickier for borrowers, particularly during the coronavirus pandemic. Finding the lowest possible rate can be a challenge.

What is a jumbo mortgage?

A jumbo loan isn't necessary for most mortgage applicants, who will qualify for loans secured by Fannie Mae and Freddie Mac, two huge mortgage companies that were created by Congress.

Their backing gives lenders some protection if you don't pay back your loan, and that protection gives lenders enough confidence to offer borrowers more lenient terms.

The majority of U.S. mortgages are known as "conforming loans" because they conform to the dollar-amount limits set by Fannie Mae and Freddie Mac.

Jumbo loans are for borrowers who have to bust through those barricades. You're borrowing more money than the mortgage giants are willing to guarantee, putting your lender at greater risk if you default.

Pricey mansions and ordinary homes in neighborhoods with above-average costs of living often require homebuyers to take out "nonconforming loans": jumbo mortgages above the limits.

What are the jumbo loan thresholds?

In 2020, you'll need a jumbo loan if you want to borrow more than:

• $510,400 in most U.S. counties.

• $765,600 in high-cost areas such as San Francisco, New York City and Washington, D.C.

• $765,600 for one-unit properties throughout Alaska, Hawaii, Guam and the U.S. Virgin Islands.

The limits are adjusted each year by the Federal Housing Finance Agency to keep up with changes in home prices. The agency says homes increased in price by an average of 5.38% nationwide between 2018 and 2019, so the loan boundaries were boosted 5.38% for 2020.

The conforming limit across most of the U.S. had been $484,350 last year.

The FHFA has an interactive map that will show you the conforming loan limit for your own county.

Jumbo loan requirements

Lenders use a process known as underwriting to determine the risk of issuing you a mortgage. Underwriters consider jumbo loans especially risky, so you can expect to face harsher scrutiny and tougher requirements before getting one.

Jumbo loans made up 5.2% of mortgages to buy homes (as opposed to refinancing) in 2016 but were responsible for about 17% of the money borrowed for home purchases, according to the Federal Reserve.

Amid the high unemployment and business failures of the COVID-19 crisis, lenders have been more skittish about offering jumbo loans. Availability of the plus-size mortgages has dropped 59% compared to the pre-pandemic months early in 2020, the Mortgage Bankers Association says.

If you do need a jumbo loan, be aware:

Mortgage rates will vary

You might expect a higher mortgage rate. This has traditionally been the case with jumbos, reflecting the increased risk that companies assume when they lend people half a million dollars or more.

And, many lenders have raised their jumbo rates amid the coronavirus economy, to ward off potential borrowers. The mortgage bankers say rates on 30-year fixed-rate jumbo loans were averaging 3.33% in late September, compared to just 3.05% for conforming 30-year loans.

But many buyers do land lower rates for jumbo mortgages than for conforming loans. Lenders are charging higher rates on conforming loans as a way of passing on the cost of rising fees from Freddie Mac and Fannie Mae.

The fee hikes are part of the fallout from the housing crisis of the 2000s, which threatened Fannie and Freddie as an alarming number of homeowners lost the ability to pay their mortgages.

If you need a jumbo loan, it's vital to comparison shop to find a great rate. Get mortgage offers from at least five lenders and review them side by side, to find the lowest rate in your area.

Take a similar approach when you buy homeowners insurance for your high-dollar home. Compare rates from multiple insurers to get the coverage you need at the best possible price.

You might need a higher down payment

This, too, was generally the way things used to be. Today, not so much.

At one time, lenders wanted you to have cash to cover up to 30% of the purchase price if you were buying a pricey property requiring a jumbo loan.

Now, you can get away with putting down 20% or even 10%.

You’ll need a high credit score

Your credit score might give you more trouble when you apply for a jumbo loan. Because of the increased risk, lenders will often require you to present an outstanding score to prove you’re an extremely responsible borrower.

That generally means a score of at least 720, though more demanding lenders may require an even higher credit score.

How to get a jumbo loan

Got your eye on a big-money home? Live in an area where prices are skyrocketing? If your financial health is in good standing, you could still walk away with a competitive rate.

Here are some steps to make sure you land a jumbo mortgage when you apply:

• Get all of your documents ready. You’ll need to provide evidence that your finances are rock solid before a lender will issue a jumbo loan. Make sure you have full tax returns, W-2s and 1099s, along with bank statements that show steady employment and plenty of cash.

• Raise your credit score as far above 700 as possible. In the short term, that means paying off debt to reduce your credit utilization — the amount of your available credit that you're currently using. And, of course, keep paying all of your bills on time.

• Bolster your savings to increase the amount of cash you have on hand. The more you have in the bank, the greater confidence a lender will have in your ability to pay a substantial mortgage. Showing you have enough cash for 12 payments will go a long way.

• Put some money aside for a decent-sized down payment. Assume more of the risk personally so that a lender is more comfortable assuming the remaining risk.

• Increase your income as much as possible. Can you take on any extra work or a side hustle? The more you earn, the more buying power you have for a new home.

• Decrease your debt-to-income ratio, which you can calculate by adding up all your monthly debt payments and dividing them by your gross monthly income. Most lenders will show you the door if your ratio is above 43%, and some will be even stricter.

Depending on your current finances, you might have to work toward these goals for a year or longer before getting your dream home. A jumbo loan might also be necessary if you want to purchase an investment property, but consider speaking to a mortgage broker if you’re going down this road.

Finally, be sure to shop around when considering a jumbo mortgage. Some lenders are more lenient than others. If one bank rejects you, don't get discouraged — another might promptly say yes.