Otherwise known as a jumbo mortgage, a jumbo loan is a type of home financing that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA) or by other government-sponsored entities like Fannie Mae and Freddie Mac. Created by the U.S. Congress in 1938 and 1970 separately, these agencies provide affordability and stability to the mortgage market through purchasing conforming loans from lenders, which offers financiers liquidity to make more mortgages.
Furthermore, Fannie Mae and Freddie Mac only accept mortgages that meet their guidelines for credit scoring, down payment, loan amount, and post-closing reserves. In 2017, the conforming loan size limit for a single-unit house is $424,100, but this can still increase in some high-priced markets.
When is A Jumbo Mortgage Useful?
When your loan amount exceeds the conforming loan limit set for your locality, you can make use of a jumbo loan. Like in most country, this means you can make use of such financing when your loan exceeds $417,000.
In high-cost areas, however, the set limitations may go above $417,000. On the other hand, certain financiers will still classify anything above the loan limit as jumbo, even when the conforming limit is as high as $625,500. Therefore, do not assume if this rule applies in your area. To be sure, you can check out the FHFA site for more information or ask a specific lender which loan you are eligible for.
How to Qualify?
Apparently, the same qualifying methodology for conforming loans is also applicable to jumbo mortgages. Thus, the lenders will have to look at your credit score, total monthly debt or debt-to-income ratio, down payment size, and surplus money after closing.
Before the 2008 financial crisis, jumbo loan rates are higher compared to conforming loans by .25 percent. This is due to the fact that jumbo lenders are seen as taking greater risks when making loans that may come out as unsaleable to government-sponsored entities like Fannie Mae and Freddie Mac. Thus, in the years after the crisis, federal regulations have impacted rate markets, enabling banks to keep the jumbo rates at par with conforming rates. Therefore, it is important to ask your financier for options, especially if you are in a high-cost area.