The Difference in Rates Between Conforming and Jumbo

This is the last question that a reader had emailed me regarding qualifying for Jumbo mortgages:

"I was wondering if you can provide me with some information regarding loans.  We are looking to buy a house in the next 6-12 months with a price range of 1.1 million to 1.3 million.  We plan to put 20% down on a 30 year fixed mortgage and our credit score is between 760-790. 

1)  What type and duration of income documentation is needed for a full doc loan in the current lending environment?
2)  What is the debt to income ratio that most lenders are using for loans of this size?
3)  What is the typical interest rate differential for a loan of this size compared to the jumbo rates that you quote on Rain City Guide?"

The price differential between Jumbo and conforming mortgages has increased since the mortgage meltdown began back in August of 2007.   Prior to this, it was pretty safe to assume that a Jumbo rate (loan amount over $417,000) would be approximately 0.25% higher than a conforming rate for a 30 year fixed. 

Since mortgages over $417,000 are not backed by Fannie Mae or Freddie Mac, they are considered to be a bit riskier to investors.  With what has transpired over these past few months in the mortgage industry, the spread between conforming and non-conforming rates is changing constantly.

Here's a snapshot of rates I've posted for 30 year fixed conforming (conf) and non-conforming (jumbo):

• May 11, 2007:  conf 5.875% - jumbo 6.125% (the spread was predictibly at 0.25% prior).
• May 25, 2007:  conf 6.250% - jumbo 6.250%
• June 7, 2007: I published an alert to lock in your rate (99% of the time, I encourage borrowers to always lock in their rates).  The next day, we had conf. and jumbo rates at 6.500%.
• July 27, 2007: conf 6.375% - jumbo 6.625% (back to the "normal" 0.25% spread).
• August 3, 2007:  conf 6.250% - jumbo 6.625%.  This is "Friday's Rates"...however rates changed so dramatically in August that I was compelled to post Mondays rates:
• August 6, 2007: conf 6.250% - jumbo 7.125% (0.875% spread)
• September 7, 2007:  conf 6.00% - jumbo 7.25%  (1.25% spread)
• October 19, 2007: conf 5.875% - jumbo 6.500% (0.625% spread)
• November 30, 2007: conf 5.625% - jumbo 6.750% (1.125% spread)
• December 21, 2007: conf 5.875% - jumbo 6.750% (0.875% spread)

The difference between conforming and jumbo rates in our current market can range anywhere from 0.75% - 1.25% based on recent trends.   With that said, this can change at any time.  This is a volitile market for mortgage interest rates.   

Plus, effective January 1, 2008, many lenders are switching to credit risk based pricing for conforming mortgages.  This may narrow the gap between conforming and jumbo, depending on your credit score (bringing the conforming rate up which is not the way most of us would like to reduce the difference of rate).

I do recommend checking out my rate posts on Fridays (either here or at Rain City Guide) just to make sure they're in reason with what you're being quoted by your Mortgage Professional.   Some lenders may not have other resources (like a broker or correspondent lender has) and therefore are limited with the rates they can provide.  Some Loan Officers (or the mortgage company they are employed at) may be padding the rates during these times to.  I was just over at another local blog and the rate spread they're currently quoting for jumbo vs. conforming is 1.125%.   I don't believe she's padding the rates, she works for a bank so it could just be all she has to offer.

I will do a follow up post on loans for million dollar homes after the New Year.