A jumbo loan is a home loan that surpasses the conforming loan limit set by Fannie Mae and Freddie Mac. The maximum loan amount for a single-family home is currently set at $417,000. In counties where the cost of living is higher such as New York or San Francisco, the limit is set to $625,000. Interest rates for jumbo loans are typically competitive and may even be lower than rates quoted on conforming loans.
For buyers that qualify, there are many advantages offered by jumbo loans, including:
To be considered for a jumbo loan, borrowers must have proof of high income, excellent credit and the ability to make a large down payment. Jumbo loans pose a greater risk for the lender as they are not insured by the federal government. Also, high priced properties are more easily affected by changes in the real estate market. Borrowers must demonstrate a low debt-to-income ratio and be able to easily pay the PITI (principle, interest, taxes, insurance). As a general rule, your payment should not be above 38% of your gross income.
Lenders want to see applicants with a minimum credit score of 720, and they will usually pull credit reports from all three major credit bureaus. Some lenders, will want the average of all three credit reports to be at least 760. It’s feasible to get a jumbo loan with a 20% down payment, but many times borrowers will be required to pay at least 30%. Another qualifying factor is the property. Not all properties are eligible and many times lenders will not give out jumbo loans to investment properties or secondary homes.
The Dodd-Frank Act, is a bill that requires mortgages to meet certain criteria to be considered a "Qualified Mortgage." This bill means that jumbo home loans include more stringent requirements than they did in the past. Interest only jumbo loans, and jumbo loans that include large balloon payments at the end of the loan do not qualify. This makes jumbo loans much harder to come by, yet much safer for consumers.
Most jumbo loans are adjustable-rate mortgages. Fixed-rate jumbo loans are rare because banks usually keep jumbo loans on their books, since they can’t sell them to Fannie Mae or Freddie Mac. Banks will use deposits from their customers to pay the loans. Because interest rates on deposits are low, banks can still make a decent profit on jumbo loans that have low mortgage rates. Since deposit rates are due to rise eventually, banks feel more comfortable offering jumbo ARMs.