The simple guide to how jumbo mortgages work

Information verified correct on February 21st, 2017

If you’re thinking of purchasing an expensive property and you have a large down payment, then a jumbo loan may be right for you.Jumbo Mortgages

Whether you intend to buy a luxury house or you’d like to settle down in an area with high property values, a jumbo loan may help you step into the high-end property market. Although jumbo loans enable you to access a larger amount of funds, they are typically more expensive due to the higher risk involved, and they can be more difficult to qualify for compared to conventional mortgages.

What is a jumbo mortgage?

A jumbo mortgage is a mortgage product that normally exceeds conforming loan limits as governed by Fannie Mae and Freddie Mac, which form part of the US Federal Housing Finance Agency. In the US, the limit on conforming loans is $417,000 for all states (excluding Hawaii and Alaska), but jumbo mortgages exceed this limit.

The interest charged on a jumbo mortgage is generally higher than a conforming mortgage due to the higher risk to the lender. Additionally, jumbo loans often have stricter underwriting and larger down payment requirements due to the larger loan amount.

Jumbo loans are available for primary residences, vacation homes, and investment property types. Fixed or adjustable rates are available.

Is a jumbo loan right for me?

If you’re thinking of purchasing an expensive property and you have a low debt-to-income ratio, a high credit score, and a large down payment, then a jumbo loan may be right for you. Jumbo loans are better suited to high income earners that have good credit history and financial discipline.

Pros and cons of a jumbo loan

Pros

  • Access to significant funds. A major benefit of a jumbo loan is that you can access a substantial amount of funds that exceed conforming limits. This means you can more easily purchase a luxury or highly valued property.
  • Convenience. With a jumbo mortgage, you don’t have to take out two or more loans. Instead, you can just manage the one mortgage.
  • Different rate programs. You can choose from a fixed rate or an adjustable rate, which provides you with the flexibility to structure the loan in a way that suits you.

Cons

  • Higher interest rate. Due to the higher degree of risk to the lender, banks will normally charge an interest rate that is 0.5-1.5% higher than a traditional loan.
  • Market risk. If your property falls in value, you will lose equity in your home, which could be problematic as jumbo loans typically come with higher interest rates.
  • Stricter credit requirements. It is more difficult to be approved for a jumbo loan compared to a standard mortgage. You need to provide evidence that you have the income to afford this type of loan. If you have a credit score lower than 600, you will probably have to put down a larger down payment to offset the risk.
  • Difficult to refinance. Jumbo loans can be difficult to refinance during the loan term. This means that if you have a fixed interest rate you may find it difficult to refinance with another lender to take advantage of a lower rate.

What’s the difference between a jumbo loan and a conventional loan?

The main difference between a jumbo mortgage and a conventional mortgage is that there is a much larger market for conventional mortgages compared to jumbo loans. Consequently, jumbo loans represent a higher risk to the lender and are therefore associated with higher interest rates and costs due to the lower level of competition in the market in relation to standard mortgages.

Is a jumbo mortgage risky?

Generally, a jumbo mortgage is considered riskier than other types of mortgages as they are not regulated by Freddie Mac or Fannie Mae. Jumbo loans are also considered risky due to the larger loan size, larger required down payment and higher costs.

However, in recent years, the spread in interest rates between jumbo and traditional loans has reduced.

Will I qualify for a jumbo mortgage?

To qualify for a jumbo mortgage in the US, you will generally need to meet the following criteria:

  • Good credit history. You will typically need a FICO score of 700 or above. You will need to show that you have at least six months’ worth of recent mortgage payments in the bank account.
  • Income and assets. When you apply for a jumbo loan, you will need 20% of the loan value as a down payment. The lender will therefore need to see evidence of your employment, earning potential, and assets to ensure that you can repay the loan.

Do I have to pay mortgage insurance?

Private mortgage insurance (PMI) allows you to purchase insurance on behalf of the lender, which protects the lender in the event that you default on a conventional loan. However, there is no PMI within the jumbo loan industry, which means you will most likely need to complete a payment of 20%. This is higher compared to standard loans.

Frequently asked questions

What are the down payment requirements?

Jumbo Mortgage Loans typically require a down payment of more than 20%

What is the maximum amount that I can borrow?

Jumbo Mortgage Loan limits vary from $417,000 to $3,000,000, depending on the program. The highest FHA Jumbo Loan as of now is $729,750.

What are the jumbo loan limits in California?

Anywhere from $417,000 to $625,500 depending on the county.


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