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I am really interested in the whole banking-mortgage system in the US. I learned that for mortgages

  • under appox. $425,000

the deposit is about 5%. Whereas for mortgages

  • over appox. $425,000

the deposit is about 10%. Ouch!

My questions,

  • is this pretty universal in all areas of the US? is the cutoff point about the same? Does it vary by institution or is it just an institution rule?

  • this indeed what is called a "Jumbo" loan, or is that something else?

  • who or what regulatory agency ultimately is responsible for this? (Years ago they would just throw 100+% of anything at anyone, so long as you could almost write an X. I guess this changed with one of the financial crisis? But which entity or rule or law actually determines this?)

But moreover .....

  • Can you "beat" this, and get a larger mortgage with only the 5% deposit??

(Is there a "deposit hack" would be the modern way to phrase this I guess!)

(Pls note that this Q is just about the USA. Obviously, mortgage idiom is wildly different in different jurisdictions.)

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  • Don't have time to answer, but some people use piggyback loans as an alternative.
    – Hart CO
    May 29, 2018 at 15:58
  • It's multiple smaller mortgages instead of one jumbo loan.
    – Hart CO
    May 29, 2018 at 16:41
  • ahhh ! i guess that is the answer! surprising you can get away with that !
    – Fattie
    May 29, 2018 at 16:55
  • Relevant article about piggyback loans: bankrate.com/finance/mortgages/piggyback-mortgages
    – BobbyScon
    May 29, 2018 at 18:22

3 Answers 3

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Jumbo loan amounts (i.e. the threshold to be called "Jumbo") is, as you described, $424,100 for the majority of the country. In certain areas, where the average home price is higher to start with, the amount to be considered a Jumbo loan can be higher, to the tune of $600K - $700K. Of the 3,143 counties in the US, 93% use this amount. The remaining 7% are more expensive places to live like Hawai'i, NYC, LA, and San Francisco. Source.

The down payment (what we say instead of deposit) is typically a higher amount. This is about mitigating risk on the part of the lender. There are several other requirements for Jumbo loans that you won't typically see for the lower amount loans, which are also referenced in the link above. More cash in savings (a la emergency funds), higher credit scores, second appraisals, etc.

Now, there isn't a specific hack or way to beat these requirements as you say. The reason for that is because nothing is written in stone. When it comes to negotiating mortgage rates, pretty much everything is on the table. I can negotiate the down payment amount, the interest rate, the payment timeline (10 years, 20 years, 30 years), etc. Your negotiating power comes down to how appealing of a customer you are to the mortgage broker. If I can get 3 or 4 banks competing for my business (as anyone looking to get a mortgage should do), I can find all sorts of ways to get closer to my ideal mortgage scenario.

Additionally, it's worth noting that although many banks are offering 5% down payments on those loans, it is not going to give you as strong a negotiation point and typically results in higher interest rates. You will also have to pay mortgage insurance if you put less than 20% down. If you look at the mortgage history of the US (last 15 years), you'll see that when the real estate bubble burst, it was in large part because of horrific lending practices by banks. They were offering mortgages with no money down, or even paying people to take mortgages (negative % down). Many home buyers got trapped in mortgages they couldn't actually afford because of these marketing tactics and sub-prime lending scams. A 5% down payment is considered to be extremely low and often ill-advised in most financial advice forums. There's a lot more to that discussion that I won't get into here as it can become a hot topic.

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    Should note that much of this is only relevant if it is (or will become) a Fannie Mae/Freddie Mac loan.
    – Hart CO
    May 29, 2018 at 15:59
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    correct spelling of Hawai'i - bonus !
    – Fattie
    May 29, 2018 at 16:30
  • HTML escape for the 'okina is ʻ, which works in answers but not in comments?! May 30, 2018 at 21:51
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To the part of the question

who or what regulatory agency ultimately is responsible for this? (Years ago they would just throw 100+% of anything at anyone, so long as you could almost write an X. I guess this changed with one of the financial crisis? But which entity or rule or law actually determines this?)

The artifact for this is the Fannie Mae Freddie Mac uniform security instrument. The law was passed in 1970, the Emergency Home Finance Act. The regulatory agency that sets the limits from time to time was originally named OFHEO, part of the Department of Housing and Urban Development, but after a 2008 reorganization, is currently the Federal Housing Finance Agency in HUD.

Fascinating and almost conversational academic journal article on the complete path dependency that led to this from which I take this quote:

Under the terms of their charters, Fannie Mae and Freddie Mac may only purchase loans that meet certain requirements, including requirements limiting loan amount and loan-to-value ratio. Loans that meet the requirements for purchase by the GSEs are "conforming" loans, and loans that do not are "non-conforming." Loans that are non-conforming because they exceed the conforming loan limits set by OFHEO, are called "jumbo" loans.

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  • Absolutely fantastic information, @user662852, thanks. That is precisely what I was asking. Cheers.
    – Fattie
    Jun 1, 2018 at 11:59
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The "hack" for this is no real hack at all. BTW this holds true for the majority of the country, not the very high cost of living areas.

Lets say you buy a home in 2005 for 200k. You put it on a 15 year mortgage, and make your payments on time every time. Now you want a bigger, nicer house. You have a little money saved, your mortgage balance is now around 20K or so, and you can sell your house for 280K. You have your heart set on a 520k house.

You net about 240k from the sale of your house. You have about 10k in savings that you use towards this purchase. You negotiate the new house down to 495k.

Your new mortgage is now 245k on a 500k house. If interests rates are lower now, your payment may be less than what it was on the original house. Even if it is more, you have probably received pay raises that out paced the mortgage increase.

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  • Hi @PeteB. Makes perfect sense. In the example, couldn't you also keep house A (renting it out) and use the equity for mortgage B ?
    – Fattie
    Jun 1, 2018 at 12:00
  • @Fattie despite the claims on the infomercials those kinds of schemes often lead to bankruptcy and losing both houses. If you are going to do rental, only do so if you can pay cash for them. I know several people who have lost most of their wealth putting minimal down on rental properties.
    – Pete B.
    Jun 1, 2018 at 13:07
  • @Fattie: Renting out a house is work. You either do the work yourself, or pay a property manager to do it. Some people like the work, or think it's worth the effort (or the manager's fees), others don't.
    – jamesqf
    Jun 1, 2018 at 18:27
  • all true @jamesqf, anyways a bit off topic here
    – Fattie
    Jun 1, 2018 at 21:09

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