A jumbo mortgage is a loan that has high credit quality but is an amount above conventional conforming loan limit. Jumbo mortgages exceed the “conforming limit,” which is the maximum loan amount that Fannie Mae and Freddie Mac will buy. There are different jumbo limits depending on the number of units on the property, as well as where the property is located.
The “conforming limit” for single-family home is $417,000 in all states with the exception of Hawaii and Alaska, where the limit is $625,500. Jumbo loans are available for primary and secondary residences as well as vacation and investment properties. For those who are in the market for a home exceeding the conforming limits, consider a jumbo loan, however, keep in mind the requirements are stricter than that of conforming loans.
In recent years the qualifications for a jumbo mortgage have become stricter. The underwriting process for jumbo mortgages is similar to conforming mortgages, however, the requirements for each differ. A consideration for borrowers in the market for jumbo mortgages is that you will build equity slowly because payments during the first several years will go toward interest rather than the principal balance.
To begin, there is no private mortgage insurance (PMI), and with jumbo mortgages the down payment required is typically larger. In recent years the down payment required for a jumbo mortgage has increased. Most lenders require at least a 20% down payment to approve a jumbo loan. The maximum debt-to-income ratio for jumbo mortgage borrowers is 45%. Typically the credit score required for a jumbo mortgage must be greater than 700. Lenders require at least 6 months worth of reserves in their bank accounts after closing, while conforming loans require fewer reserves set aside.
One major difference between a regular and jumbo mortgage is that the interest rates on jumbo loans are greater than the average mortgage rate because they pose a greater risk to the mortgage lender. The difference between the jumbo rate and the conforming rate can typically be ascertained by evaluating the current market price of risk. It is important to speak with various lenders when shopping for a jumbo mortgage. Jumbo loans typically come from larger banks that keep the loans themselves instead of selling them. Thus banks make their money by charging a higher interest rates on mortgages than they pay on their customers’ deposits.
On the upside, jumbo mortgage rates have reached a historic low and the interest on these types of loans are tax deductible up to $1 million. Depending on where you are looking to purchase a home, real estate can be expensive and an advantage to the jumbo loan means you can borrow the money to buy that expensive home without draining your savings. Likewise you won’t have to take out two or more loans to pay for real estate. It is important to explore the various lenders and interest rates and find the best fit for you.
Best Mortgage Rates
Because the jumbo loan limits can vary so greatly, it is important to use a system like Best Mortgage Rates to calculate and compare various mortgage rates throughout the country. Our easy online tool allows you to browse the various rates offered by lenders nationwide. Find the best mortgage rate for you in your search for a jumbo mortgage.