What is a Jumbo Loan?
Before talking about Jumbo loans, it is important to first consider how mortgages work. Mortgages are loans taken out to purchase property and these loans are backed or secured by an entity. Usually, in such cases, the loan program is backed and created by a government office to help a certain demographic to become homeowners.
The FHA, USDA, and VA loans are examples of government backed mortgage programs. However, there are entities called Government Sponsored Entities or GSE, that exist. These are companies created by congress to provide public service. In the context of mortgages, these GSE are responsible for setting guidelines and standards for mortgages in the market. These GSE also purchase the mortgages from the market.
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are examples of GSE companies that set the guidelines for mortgages and guarantee mortgages. The loans that meet these guidelines are known as Conforming Loans and the loans that do not meet these guidelines are known as Non-Confirming Loans.
To ensure that the prices of homes remain affordable for American citizens, the Federal Housing Finance Agency (FHFA) announces the limits for loans, after evaluating the real estate market to reach this decision. These limits are the guidelines that are Fannie Mae and Freddie Mac follow when dealing with mortgages. Meaning that if a loan does not meet the guidelines of the FHFA then it will be considered as a Non-Conforming loan and will not be guaranteed or purchase by Fannie Mae and Freddie Mac. Such loans are called Jumbo Loans. This is usually because they exceed the limit amount that is set by the FHFA.
What is the Eligibility for Jumbo loans?
The following are requirements of Jumbo loans:
- You should have a credit score of 700 or higher. Jumbo loans exceed limits prescribed by the FHFA and thusly require higher credit scores by lenders to be sure about the repayment ability of the borrower.
- There might be multiple appraisals done for the property to confirm that the purchase price and the amount the borrower wants are in line.
- Extensive documentation will be required to confirm proof of income, proof of residence, etc. Since the requirements for Jumbo loans are much higher than your average conventional loan.
- Down payment of up to 20% may be required, however, this varies by lender and it is possible to find lower down payment options.
- The borrower will have to provide evidence that they have funds for up to the first year of the mortgage payments, in advance.
- The monthly payment will be no more than 38% of the borrower’s monthly income, after removing taxes.
- The borrower must have a debt to income ratio of 43%, however, this is also dependent on the lender and the accepted ratio might be lower or higher than this number.
Do Jumbo loans require Private Mortgage Insurance?
This will depend on the lender. In most cases, if there is a down payment of 20% then Private Mortgage Insurance might not be required. However, if the lender is offering a down payment of 5% or 10% then Private Mortgage Insurance might be compulsory.
Is it possible to get Jumbo loans with low credit scores?
The conventional requirement if jumbo loans is a credit score of 700 or higher. However, it is possible that a lender might accept credit scores of 680. However, it might also be possible that acceptance of low credit scores would include paying higher rates for the mortgage.
Do Jumbo loans have high interest rates?
The interest rates that apply to a Jumbo mortgage vary by lender. So it is possible that a borrower is offered lower interest rates in one place but more by another lender.
What is the Jumbo loan amount?
The Jumbo loan amounts vary by property type, region and they change on an annual basis. The 2021 jumbo loan amount for California is $822,375 and $548,250 for the rest of the United States. Any mortgage that exceeds these amounts will be considered as Super Jumbo loans and these loans will have even more strict requirements than Jumbo loans.