If you’re in the market for an expensive, luxury home, one of your main borrowing options will be jumbo loans. Because the economy has been making gradual improvements, jumbo loan borrowers are seeing some of the best terms and interest rates than they have in years. If you’re thinking of applying for a jumbo mortgage approaching or surpassing the million-dollar mark, however, there are a few things you should know.
What is a Jumbo Loan?
Let’s start with what makes a jumbo loan jumbo. In order to fall into that category, a home loan must exceed the Fannie Mae and Freddie Mac conforming loan limits, which generally max out at $647,200. In some other higher-priced real estate areas, that maximum can climb to $970,800.
The government typically backs loans below the conforming loan limits through agencies like Fannie Mae, Freddie Mac, FHA, and the Veterans Administration. Jumbo loans are not guaranteed or backed in any way, since they go beyond conforming dollar limits. Rather, private banks create, examine, and approve jumbo loans.
Private Lenders Determine Jumbo Mortgage Guidelines
Lender terms will vary widely since they are the ones who are most on the hook for the borrowed amount. In other words, banks are picky when it comes to the kind of borrowers who will qualify, and those qualifications become stricter as the amount of the loan increases.
That being said, if you have an excellent credit score and a steady, high income with not much debt, some lenders may offer you favorable interest rates that are comparable to conventional loans.
“Jumbos don’t have a loan limit but at a certain point do require additional approval beyond standard guidelines,” says Michael Kinane, who leads Mortgage and Consumer Lending Products at TD Bank. Over the last 12 months ending July 2014, the TD average jumbo origination loan amount was about $700,000, he says.
Of course, banks and lenders do lend out more as long as certain stipulations are met. “As loan amounts increase, higher FICOs and lower LTVs [loan-to-value ratio] are required,” says Kinane. Interest rates will also creep up slightly depending on the amount of down payment and the borrower’s credit score.
What is the Jumbo Loan Limit?
Some quick research reveals that bank-imposed jumbo loan limits are typically in the $2-3 million range. Some examples include EverBank and HSBC. However, unlike loans sold to GSEs (government sponsored enterprises – Fannie Mae and Freddie Mac), there is no true jumbo loan limit, says Kinane.
That’s why it’s important to do your research on jumbo loan lenders nowadays. “The maximum financing allowed will be up to each lender to decide in accordance with their own risk tolerances,” says Kinane. “Most lenders will internally set a limit by which loan approval would require either executive and/or committee approval, in addition to standard underwriting procedures.”
Jumbo Mortgage Credit Score and Down Payment Requirements
As Kinane points out, with most jumbo lenders, as the loan amount requested increases, the guidelines will get more and more restrictive in terms of requiring higher FICOs and higher down payments. So for lower jumbo loan amounts, the requirements could appear similar to loans sold to GSEs, but as you get higher – say, $1 million — you could see minimum down payment requirements rise from 10 – 20 percent up to 30 percent, and minimum FICOs go from 660-680 to 700-720.
“It would not be unheard of for multimillion dollar loans to have a minimum LTV of 50 percent and a minimum FICO of 740,” says Kinane.
Apply for a Low-Rate Jumbo Mortgage
If you have stellar credit and a good chunk of change to use as a down payment on your dream home, there is a jumbo mortgage programs out there for you. By comparing lenders’ programs, you can find the ones that offer the best rates for the amount of funding you need.
Today’s jumbo lenders are offering incredibly low jumbo mortgage rates.