When you live in a higher priced area with a high cost of living, the homes you are looking to buy probably have big price tags.
So, you might need to take out a jumbo loan. You ask — What is a jumbo loan? Well, it’s a little more complicated than being just a bigger loan.
“A jumbo loan is a misunderstood term or a misused term,” says Patrick Collins, executive vice president/production manager at Atlantic Coast Mortgage in Fairfax, Va. “Some people think of them as non-agency loans because they don’t conform to agency guidelines. But there are a few other reasons why it is non-conforming loan. For instance, it’s not eligible for sale by Fannie Mae or Freddie Mac because of the loan amount.”
Conforming loans are loans with an amount that is at or under the maximum loan amount set by Fannie Mae and Freddie Mac.
According to the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac were created by Congress to provide liquidity, stability and affordability to the mortgage market.
They also buy mortgages from lenders, and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities that may be sold. But there are maximum amounts for loans that they will buy from lenders, Collins says.
What are the maximum amounts for conforming loans?
Each year the FHFA sets a maximum amount for loans that Fannie Mae and Freddie Mac will buy from lenders, says Collins.
This year, the loan limits in most areas of the country are $424,100, although they go as high as $636,150 in some high-cost parts of the U.S.
Collins believes those limits will be raised next year or the next because the home prices are going up in areas that are high-balance areas already.
“The $636,150 loan amount doesn’t even get you shopping in large areas of where I live,” Collins says.
Where can you get a jumbo loan?
A handful of large banks and many regional banks offer jumbo loans, Collins says. It will pay to shop around for a jumbo loan, though, because there can be definite disparities in guidelines and offerings.
There is consistency in the fact that jumbo loans are qualified mortgages and lenders have to make sure that the borrower demonstrates and can document their ability to pay back the loan.
What does it take to get a jumbo loan?
“The jumbo loan world has been loosening up a little bit the past few years,” Collins explains.
Jumbo lenders are allowing the mortgage companies to have a little more control on underwriting the loans to speed up the process. However, they aren’t loosening of credit standards or guidelines.
Does FHA, USDA, VA, etc. offer jumbo loans besides conventional?
VA loans basically don’t have a limit, Collins says. The veteran has to have enough entitlement available to use, and then they can do a pretty large VA loan.
It’s not called a jumbo mortgage, though. Technically, any loan such as that is called a high balance whether it’s a VA, FHA or USDA loan.
What does it take to qualify for one that is different than a regular mortgage loan?
There are no uniform guidelines from lender to lender, he says.
“It typically takes a lower debt to income ratio, and it takes a larger down payment and more assets. You need a stronger credit profile,” he explains. You can get a Fannie Mae loan with a 620 FICO score. You definitely can’t do that with a jumbo loan.”
Who gets jumbo loans?
In Collins’ area of Virginia and Washington, D.C., a lot of people get jumbo loans. It’s a very expensive area to live and usually, it’s a dual income household with a good credit profile.
“They aren’t buying mansions. It’s just that you won’t get a home especially in Alexandria for under $1 million,” he says.
Is the interest rate larger on a jumbo loan than a regular mortgage loan?
There isn’t consistency whether it’s higher or lower, Collins remarks.
Historically over the last 10 years, lenders have seen it both ways. But right now, there isn’t much of a difference in the interest rate between a jumbo or conforming loan.
If buyers go directly to the banks, they can get better rates, he adds. Some people getting jumbo mortgages are putting down 30 or even 40 percent on the loan, and that gets them about 1/8 to ¼ percentage less on their interest rate than a regular conventional loan.
Do jumbo loans get defaulted on more than regular mortgage loans?
“Performance of jumbo loans is unbelievable. But the lenders are pickier, and they are tighter on credit, assets and down payment,” he says.