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A jumbo loan, also known as a jumbo mortgage, is a type of mortgage loan that exceeds the conforming loan limits established by the Federal Housing Finance Agency (FHFA) for conventional loans. These conforming loan limits vary by location but are generally set at a level that is deemed “conforming” to the standards set by Fannie Mae and Freddie Mac, government-sponsored enterprises that purchase and securitize mortgage loans. Jumbo loans are typically used to finance high-value homes and properties that exceed the conforming loan limits. Here are the key features and aspects of jumbo loans:
Loan Amount: The defining characteristic of a jumbo loan is that it exceeds the conforming loan limits in a given area. The exact loan limit varies by region and can change annually. In most parts of the United States, as of my last knowledge update in September 2021, the conforming loan limit was $548,250 for a single-family home. Jumbo loans start above this limit.
Higher Borrowing Costs: Jumbo loans often come with higher interest rates compared to conforming loans. Lenders view jumbo loans as riskier because they involve larger loan amounts, and there is no government backing or insurance for these loans, as there is with FHA or VA loans. As a result, borrowers may face higher costs in the form of higher interest rates and potentially more stringent credit and underwriting requirements.
Stricter Credit and Income Requirements: Because of the increased risk associated with jumbo loans, lenders often impose stricter credit score and income requirements on borrowers. They may require a higher credit score and a lower debt-to-income ratio to qualify for a jumbo loan.
Larger Down Payments: Jumbo loans typically require larger down payments than conforming loans. While conforming loans often allow down payments as low as 3% to 5%, jumbo loans may require down payments of 20% or more. The specific down payment requirement can vary by lender and other factors.
Non-Conforming Properties: Jumbo loans can be used to finance various types of properties, including single-family homes, condos, multi-unit properties, and luxury homes that exceed the conforming loan limits.
Fixed and Adjustable Rates: Jumbo loans are available with both fixed interest rates (which remain constant over the life of the loan) and adjustable interest rates (which can change at specified intervals).
Portfolio Loans: Some lenders hold jumbo loans in their portfolio rather than selling them in the secondary mortgage market. These portfolio loans may have unique terms and underwriting criteria.
Stringent Documentation: Lenders may require more extensive documentation to verify the borrower’s financial stability and ability to repay the loan, including income verification, asset verification, and detailed credit history.
Private Mortgage Insurance (PMI): In cases where borrowers make smaller down payments on jumbo loans, they may be required to obtain private mortgage insurance (PMI) to mitigate the lender’s risk. PMI can add to the overall cost of the loan.
Interest-Only Options: Some jumbo loans offer interest-only payment options for a specified period. During this time, borrowers pay only the interest on the loan and not the principal, which can result in lower initial monthly payments.
It’s important for potential borrowers considering a jumbo loan to shop around for lenders, compare rates and terms, and carefully assess their financial situation. Due to the complexity and size of jumbo loans, it’s often beneficial to work with experienced mortgage professionals who can guide borrowers through the application process and help them find the best jumbo loan option for their needs. Additionally, it’s important to be aware that loan limits and lending criteria can change over time, so it’s a good idea to check the latest information from lending institutions and government agencies.
Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications. These kinds of mortgages gained traction as the housing market recovered following the Great Recession.
- Homeowners must undergo more rigorous credit requirements than those applying for a conventional loan.
- Approval requires a stellar credit score and a very low debt-to-income (DTI) ratio.
- The average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages, while down payments are roughly 10% to 15% of the total purchase price.
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Randal Collen MLO #2386273 & DRE #01452367