What Is a Jumbo Mortgage Loan?
What is a Jumbo Loan?
Jumbo mortgages are home loans at amounts higher than the prevailing “conforming loan” limit. Borrowers generally pay a mortgage interest-rate premium for a jumbo loan vs. a conventional loan, which is intended to compensate lenders for the larger loss they’ll suffer on a property if the homeowner defaults on the mortgage.
The setting of the nationwide conforming-loan limit falls to U.S. government-supported companies Fannie Mae and Freddie Mac, which purchase packages of conforming mortgages from banks and other lenders and resell them to investors. Insurers and investment banks step in to buy up portfolios of jumbo mortgages.
The difference, or spread, between conventional and jumbo loan mortgage rates is a function of the relative risk of each loan type at any given moment. Historically, the mortgage interest rate spread between the two typically runs about one quarter to one half of a percentage point. In times of heightened concern about the real estate market, such as now, the spread can be 1% or more.
What qualifies as a Jumbo Loan?
Before this year, any mortgage over $417,000 dollars was considered a jumbo loan. Jumbo loans accounted for one in seven mortgages in the U.S. in 2007. That number is down this year because lenders are saddled with disposing of millions of foreclosed properties and are reluctant to make riskier loans that don’t fall within Fannie Mae and Freddy Mac’s guidelines.
Congress this year temporarily raised the conforming-loan limit to a maximum of $729,750 based on regional housing costs effective through December 31, 2008. The limit is set at either the present $417,000 cutoff for conventional loans or 125% of the area’s median home price up to the $729,750, whichever is higher.
This change, designed to stimulate lending for higher-priced homes, has led to creation of a new category informally called the “jumbo-conforming” loans. These are loans in amounts between the traditional conforming loan limit and the new temporary ceiling.
Qualifying for a Jumbo Loan
Because jumbo loans are larger and riskier for lenders, underwriting criteria are more strict.
To qualify for a jumbo loan, lenders may require a FICO score of at least 700, and occasionally as high as 720.
Lenders will look at your debt-to-income ratio (DTI) to make sure you don’t get into too much debt, however they may be more lenient if you have a lot of cash on hand. However, some lenders have a hard cap of 45% DTI.
If you have a lot of money in the bank, you’ll have a better chance of getting a jumbo loan. Lenders frequently urge jumbo loan customers to show that they have enough financial reserves to repay a year’s worth of mortgage payments.
You’ll need a lot of documents to verify your financial stability, sometimes even more than for a conforming loan. When applying, be prepared to provide your complete tax returns, W-2s, and 1099s, as well as bank records and details on any investment accounts.
A second home appraisal for the property you want to buy may be required by some lenders.
How did the 2007 Housing Market Crash Affect Jumbo Loans?
After an initial hesitancy on the banking industry’s part, lenders began cutting interest rates on the jumbo-conforming loans, bringing them closer in line with conventional fixed and adjustable rate offerings. Fannie Mae and Freddie Mac’s qualifying criteria for these loans remains stricter, necessitating somewhat higher credit scores, more extensive income documentation, bigger down payments, and lower debt-to-income ratios.
If you’re in the market for a jumbo or conforming-jumbo loan, you may have to put up a slightly larger down payment. Taking out a jumbo loan also tends to be more expensive in terms of closing costs, though lenders and title insurance companies have been modifying their fee structures to bring down those costs, particularly when related to a mortgage loan refinance.
If you’re looking for more information about jumbo mortgage loans, you may also be interested in the recent Fortune Magazine article, The Best Deals in Jumbo Mortgages.