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When it comes to mortgages, most home owners want flexibility. What many homeowners might not realize is that jumbo loans are more flexible than one might think. A jumbo mortgage typically has lower rates than some other mortgages that are offered today. We are going to explain to you what a jumbo mortgage is, how it works and what criteria one must meet in order to obtain this type of loan.
Where Did They Come From?
Also know as non-conforming mortgages, jumbo mortgages are loans that lenders make when a borrower doesn’t “conform” to the the guidelines of Fannie Mae or Freddie Mac. Created by congress in 1938 and 1970, respectively, Fannie and Freddie provide stability and affordability to the mortgage market by buying what is called “conforming” mortgages from mortgage lenders therefore giving them liquidity to make more mortgages. One stipulation with Fannie and Freddie is that they will only buy mortgages that meet their guidelines. These guidelines are for down payment, credit score and loan size just to name a few. When a loan is greater than their loan size limit ($417,000 nationwide and exceptions as high as $625,500 in high-priced markets) it is known as a jumbo mortgage.
Are the Rates Higher or Lower Than Conforming Loans?
It used to be that the non-conforming, or jumbo, loans had 0.25 percent higher rates than conforming loans because they were perceived as a higher risk because they couldn’t be sold to the government (Fannie and Freddie). There has, however, been a bit of contradiction over the last couple years when it comes to conforming/non-conforming loans making jumbo loan rates lower than the conforming loans! The reason for this is because investors for Fannie and Freddie have been betting that the U.S. economy will improve at a greater rate than what it is and therefore the Federal Reserve has not hiked up the rates that impact how much the banks must pay to depositors (have we lost you yet? ). What this means is that the banks are currently paying less to depositors and therefore can offer lower rates for their non-conforming loans.
Loan Criteria for Jumbo Loans
- Down payments on jumbo loans have become a bit more flexible therefore you can now put
down as little as 10% for loan amounts of $1 million and higher. Unlike the conforming loans, these loans do not require mortgage insurance. The trade off for this is that the lender will offer a rate that is 0.25% higher and require a 30-36% debt-to-income ratio.
- There is a little more flexibility when it comes to calculating income with a jumbo loan. Lets say you are looking to obtain a non-conforming loan and you have had the same job for 15 years but recently started your own business, a conforming loan would require you to show two years of filed self-employed tax returns for that income. A jumbo loan may only require one year of filed returns if you could show that the business was stable and growing.
- The credit score category is one that is pretty consistent across the board. A credit score with a 680 will generally get you most available options but of course with a higher top-tier score of 780 or greater you are looking at significantly lowered interest rates.
- For a jumbo loan a lender will want to see at least 12 months of reserves (money left over after closing), half of that in your checking and savings and half in retirement assets. For conforming loans this reserve only has to equate to 6 months. Exceptions can be made if your debt-to-income ratio is low and you put down a larger down payment.
If you have a jumbo loan your payment amount could decrease over the life of the loan. Some banks that keep their jumbo loans (instead of selling them after closing) have begun to offer re-amortization on loans over $417,000. This means that your payment decreases as you pay down the loan. This, of course, all depends on your lender.
Now that you have a better understanding of what a jumbo loan is and how it works you can now apply this to any thoughts you might be having about buying a home with a higher price tag. As with any loan, it is always best that you talk to a mortgage lender about all of your options and what the best route is for you. If you have additional questions or would like to get a pre-approval for a loan please contact First Ohio here !