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Jumbo loans, also known as jumbo mortgages, are loans for larger amounts than the traditional conforming loans’ limits. During the housing bubble of the previous decade, jumbo loans became more popular and frequent as prices for even modest houses climbed higher and higher. Typically before then jumbo loans were reserved for more high-end dwellings and pricey markets like San Francisco or New York.
What are the limits of conforming loans?
Fannie Mae and Freddie Mac set conforming loan limits. These limits are the maximum loan amount that either of these two government-sponsored enterprises will buy the loan from a bank, freeing up their capital. When Fannie Mae and Freddie Mac won’t cover the full amount, the loan is considered a jumbo loan. As a result these loans have higher interest rates, and are considered risky to lenders, because they are unable to recoup the full capital of the loan right away.
Conforming loan limits vary a little based on county or state, and the number of bedroom units in the house. However, in general the loan limit is $417,000 and $625,500 for a single unit home in “high cost” areas. The Federal Housing Finance Agency provides a table of all counties for this calendar year, and their loan limits.
Jumbo loans refer to the value of the loan in question, not the amount you put down. For example, both a $500,000 house with 5% down and a $1,000,000 house with 20% down require jumbo loans.
Who qualifies for a jumbo loan?
Since jumbo loans are considered a risky investment to lenders, and contributed to the housing bubble bursting, there are more requirements in order to qualify for a jumbo loan than a conventional one.
Debt-to-income: One criterion is a low
debt-to-income ratio. A lender wants to ensure that you will be able to comfortably pay the principal on the loan, as well as taxes, interest and insurance each month. A good rule of thumb for a reasonable income to have when applying for a jumbo loan is that your monthly mortgage payment (principal, interest, property taxes and insurance) is below 28% of your pre-tax income, and that your overall debt payments (the mortgage payment as well as student loans, credit card bills and other debt) is below 36% of your income.
Excellent credit: A person’s credit score will also be considered. Typically the lowest score a person can have and still be eligible for a jumbo is a 720, which is in the “excellent” range for credit scores, the highest possible score being an 850.
Down payment: The final qualifier for a jumbo loan is the down payment. Often, jumbo loans require larger down payments, to mitigate risk. Requirements vary by lender, though. You may be able to get away with less than 30% down, especially in more expensive areas.
Who should consider a jumbo loan?
Realistically, a borrower isn’t really the one considering a jumbo loan. Since the practice of giving out more and more jumbo loans backfired on lenders when the housing market tanked they are more wary about giving them out, and are really the one’s considering if you should have one.
The question for you to ask is, “How much house can I realistically afford?” Are you in a financial place where you can pay the down payment (as well as closing costs and other fees) upfront, as well as meet the ongoing monthly payments? Will you live in the house long enough for the hefty down payment to be worthwhile?
You should only consider a jumbo loan if you can pay it off quickly, or have no other choice. Since lenders consider jumbo loans to be risky, the interest rates are often much higher than standard mortgage rates. As a result, if you can’t pay off the loan quickly, you may end up paying a small fortune in interest charges over the duration of your loan.
Jumbo elephants don’t forget
Qualifications are much stricter for jumbo loans now, and if the bank even thinks for a second you won’t make timely payments you most likely will be denied. By 2010, 10% of people with a jumbo loan were considered seriously delinquent – at least 60 days late – in their payments. Lenders’ memories may be short, but this isn’t something that they will forget anytime soon.
Unless you are making a high income, have a good credit score, and a low debt-to-income ratio, it’s wise to avoid a jumbo loan. If you can pay more on a down payment in order to keep your loan within the conforming loan limits, do it: You’ll end up paying way less in interest for your home.