What is a Jumbo loan?
A jumbo loan (aka jumbo mortgage) is a mortgage for an amount that exceeds the lending limit set by the Federal Housing Finance Agency (FHFA). The FHFA defines these limits on an annual basis (see Jumbo loan limit below).
Unlike conventional mortgages, jumbo loans are not eligible to purchase, secured or securitized by Fannie Mae or Freddie Mac. However, they are often securitized by institutions other than Fannie Mae or Freddie Mac.
There are many different mortgage products out there that cater to the different needs that individuals have when they are looking to purchase a home. For instance, a person with a low credit score may need a bad credit mortgage, while someone else may need a mortgage refinance. If you are in the market for a very large or expensive house, you may need what is called a jumbo mortgage.
As you might suspect, a jumbo loan is intended for a much larger amount than a regular mortgage. Most lenders have an upper limit to the amount of money they are allowed to lend to each individual who applies for a loan. This cap is generally around $417,000 dollars, so for people who need to borrow less than that amount, any lender can work with them with a variety of loan products and stick to the current interest rates.
However, if you need a loan for an amount above the $417,000 cap, you will be looking at loans in the jumbo mortgage category. There are different guidelines set by the lenders for this type of a mortgage, and this makes it worth your time to shop around for the best terms. Do remember, that fewer lenders offer jumbo loans, so your options will be fewer than with a conventional loan and it may take a little more work to find the right lender.
Jumbo loan requirements
In order to obtain a jumbo mortgage, an individual must prove income, assets, and seasoned money. Different lenders will require different types of documentation and there also may be different requirements when it comes to the down payment that must be brought in at closing.
In addition, if you are trying to get a jumbo mortgage, you will face much more stringent credit requirements than homeowners apply for a conventional loan. Indeed, jumbo loans have more credit risk than those issued by Fannie Mae or Freddie Mac. Therefore, to get approved for a jumbo loan, you will need an excellent credit score and low debt to income ratio. You may also be required to pay a higher down payment.
Jumbo loan down payment and interest rates
Most lenders require borrowers to have enough funds for down payment and a certain amount in reserve after the mortgage has closed and down payment and closing costs have been paid. Because of the larger amounts of money being loaned, a jumbo mortgage will usually have higher interest rates than the conventional mortgage. This is because of the greater amount of risk that the lender is taking in order to loan large amounts of money.
Sometimes, the interest will be lowered if you are able to make a larger down payment. The terms of jumbo loans may be fixed-rate or adjustable rate mortgages, and will vary in the length of the term with options for 15, 20, or 30 year loans being the most popular. If you are looking at an expensive house, you must keep in mind that you will be dealing with a jumbo loan.
Although jumbo mortgages used to have higher interest rates than conventional mortgages, this gap has been closing in recent years. Today, the average annual percentage rate (APR) for a jumbo mortgage loan is almost similar with conventional mortgages. In some cases, the APR for jumbo loans is actually lower. How much you can actually borrow with a jumbo depends, of course, on your assets, your credit score and the value of the home you are interested in buying.
You can use a jumbo mortgage for mortgage refinancing as well as purchasing. With the rates so low right now, people who got a jumbo loan a few years ago when they were higher may want to do a mortgage refinance to lower their payments.
Jumbo loan limit
In the United States, the limit of a jumbo loan varies by state and even county. At present, a mortgage of more than $ 417,000 is considered a jumbo loan in the vast majority of the country. However, the compliant limit is higher in areas where house prices are expensive. In the higher of these “high cost areas,” the loan limit is $ 625,500.
As of today, there are about 3,144 counties in the United States. On these, 2916 had a jumbo loan limit of $ 417,000 in 2016. Only the 108 counties have a limit of $ 625,500, including New York, Los Angeles and San Francisco. The majority of high-cost counties are in California – which is normal, given that this State is home to some of the most expensive housing markets in the country.
There are also 115 US counties with limits that are greater than $ 417,000 but less than $ 625,500. For example, the compliant limit in Fairfield County, Connecticut is set at $ 601,450. In the county of Suffolk, Mass. The jumbo loan limit is $ 523,250.
The ceiling is often even higher outside the continental United States. In fact, the boundaries in five counties of Hawaii vary between $ 625,500 and $ 721,050. Hawaii, along with Alaska, Guam and the Virgin Islands, is allowed to have higher, consistent limits.
Limits on the rise
In 2016 the FHFA increased the loan limit for 39 counties due to a high cost area adjustment. However, some mortgage experts predict that the FHFA could increase the limits across the board in 2017.
What is it that causes people to make such a prediction? In the second quarter of 2016, the home price index (HPI) was extremely close to the level of the index during the third quarter of 2007, according to the Mortgage Bankers Association. Once the HPI reaches pre-mortgage crisis levels, the FHFA can increase the compliant loan limits. During the second quarter of 2016, the FHFA indicated that US real estate prices increased by 1.2% – an increase of 5.6% over the previous year. For the buyer, this means that if the compliance limit increases, you could potentially buy a more expensive home with a conventional loan.
What you need to understand in this scenario is that if you are looking to purchase an expensive home, price tag 417,000 or more, it is important to look for the jumbo loan limit in your county. And when you begin the jumbo mortgage approval process, be prepared to deal with strict credit requirements. Have enough money for down payment and closing costs. There is no outside limit on what you can borrow: It all depends on your assets and credit score, and the value of the home. If the loan is large enough, it can be called a superb jumbo.