What is a Jumbo Loan?

The real estate market is beginning to take a turn for the better, which makes it easier to not only find the home of your dreams, but have a somewhat larger choice of mortgage options. Obtaining a mortgage is critical for enabling you access to home ownership and a jumbo mortgage is not all that different from a typical conventional mortgage, but there are some important terms and items that you should understand when applying for a jumbo loan.

What Exactly is a Jumbo Loan?

A jumbo mortgage is simply a loan that does not conform to the standard mortgage guidelines established by Freddie Mac or Fannie Mae, or exceeds a conventional loan limit. Basically, a jumbo loan in most states is a mortgage loan for properties that are valued greater than $417,000 and up to $1,000,000. Since the housing market collapse and economic crisis that began a few years back, the government has made changes that allow the Federal Housing Administration (FHA) to insure higher loan amounts for qualifying home buyers. This higher loan amount is commonly known as an FHA jumbo loan mortgages, which exceed the typical conforming loan limit, in order to help borrowers purchase in high-cost areas and/or refinance under more flexible qualifying standards. The interest rates for a jumbo mortgage are slightly higher than for a conventional home loan.

What is a Super Jumbo Loan?In situations where the loan amount is over $1 million, the loan is considered a super jumbo loan. The majority of lenders do not typically offer a residential mortgage financing option for super jumbo loans, yet some lenders will only do super jumbo loans. Just like with a jumbo loan, there are specific documentation requirements, higher interest rates and the review process are different and more stringent than with a smaller mortgage loan.

Jumbo Mortgage Lenders

It is important to understand that some lenders are more cautious when it comes to passing out a jumbo mortgage loan. The lender is taking a greater risk, because they are lending a large amount of money and if you default on a jumbo loan, the lender is at risk of losing a larger amount of money. If you are considering a jumbo mortgage loan, it is essential that you ensure the lender is qualified for this type of mortgage. So, before applying, you must let the lender know you need a jumbo or a super jumbo loan and you need to be prepared for the process.

Jumbo Mortgage Loan Process

In the majority of situations, you will need to have at least two appraisals on the property as well as provide more documentation than you would need for a typical loan program. Whereas a standard FHA-insured loan comes with less stringent underwriting guidelines, with a jumbo loan the credit score standards are not as forgiving, the down payment requirement may be higher and the interest rate will be significantly higher. Depending on the details of the loan and the borrower, the interest rate on a jumbo loan is typically .125 percent to .75 percent higher than a standard FHA mortgage loan.

Down Payment

The majority of mortgage lenders requires borrowers to come up with a down payment of at least 20 percent of the final purchase price, before approving a jumbo loan. Basically, lenders believe that if the borrower has more invested in the down payment, they are less likely to default on the home loan, so by requiring you to come up with at least a 20 percent down payment for a home that costs $500,000, the $100,000 down payment is a guarantee to the lender that you are making a significant investment in your home, before you even make the first mortgage payment.

Credit Requirements

Because there is a high risk for lenders to give a jumbo loan, they will only approve a borrower who has a strong credit score. A borrower with a high credit score has demonstrated their ability to pay their bills on time. Typically, lenders will only give out a jumbo mortgage loan to a borrower with a credit score of 720 or higher and a lender also wants the borrower to have an excellent debt-to-income ratio before being approved for a jumbo mortgage loan. The majority of jumbo loan lenders reserve this type of high risk loan for borrowers who have a monthly housing payment that is not more than about 38 percent of your pre-tax monthly income.

Pros and Cons of a Jumbo Loan

There are some attractive features associated with a jumbo mortgage loan, depending on the lender and the borrower, there may be a fast closing, no lender fees, no private mortgage insurance (PMI) and in some situations, interest only new home loans. The primary advantage of a jumbo loan program is that you have the ability to take on a higher loan amount than a traditional conforming loan allows, which is beneficial for those who have a significant income that you want to put into your home. The main disadvantage of a jumbo mortgage loan is that this type of loan carries a higher interest rate and points than a conforming loan. It is also typically harder to qualify for a jumbo loan due to the inconsistent underwriting requirements and the increased risk for lenders. A larger down payment is also required; however, the PMI is temporary. Once your home builds equity, you have the option of requesting that the lender stop charging for the PMI, in some situations, it may automatically drop off. A jumbo loan, often requires adjustable rates instead of a fixed rate, which is common for a conforming loan. This means that after five years, you could possibly have a balloon in payment and interest rates, which is designed to minimize the risks for the lender.

Just like traditional FHA loans, there are several different types of jumbo loans, including fixed-rate, hybrid and adjustable jumbo loans. Jumbo loans can be used to purchase or refinance a property, whether it is a vacation property, vacation home or a primary residence. The terms of a jumbo loan are usually the same as a smaller loan, with the most common terms being fifteen and thirty year options. The loan-to-value ratio is often as high as 100 percent. There is not a set standard amount for a loan to be considered a jumbo loan, because Freddie Mac and Fannie Mae adjust the maximum yearly, which is based on a change in real estate prices.

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