Jumbo Loans Overview

It's easier than you think to get a jumbo loan. This guide will help explain what a Jumbo Loan is and whether it's right to suit your financial situation.

What Is A Jumbo Loan?

Non-conforming mortgages are another name for a Jumbo Mortgage. A loan that a lender gives you but doesn't conform to the guidelines of Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac were established by Congress in 1938 and 1970, respectively. They buy conforming mortgages from lenders to provide stability and affordability for the mortgage market. This gives lenders liquidity to make more loans.

Fannie Mae, Freddie Mac will only purchase mortgages that meet their guidelines regarding down payment, credit score, and post-closing reserves.

The conforming loan limit for one-unit homes is $548,250 in the United States. However, it can be higher in high-priced areas. See the FHFA website.

These loans are often called jumbo mortgages. However, non-conforming mortgages can be obtained for loans that exceed these limits.

What Is The Best Time To Use A Jumbo Mortgage?

A jumbo mortgage is used when the loan amount you are seeking exceeds the local conforming loan limit. If your loan amount exceeds $548,250, you will use a Jumbo Mortgage in most areas of the country.

The conforming loan limits for certain areas are higher than $548,250. To find out the exact limits, you will need to check your local loan limits. This information is available on the FHFA website.

Lenders will consider anything exceeding $548,250 a jumbo loan, even if it is made in high-cost areas where the conforming limit is higher than $822,375.

If your area's conforming limit is higher than $548,250, don't assume that this applies. Ask your lender for details about the type of loan that you are eligible for.

What Makes A Jumbo Mortgage Different?

A conforming loan is not eligible for Jumbo mortgages. Lenders will consider credit score, down payment amount, monthly debt obligations in relation to income (called your ratio of debt-to-income), as well as money remaining after closing.

For conforming and jumbo, credit scores are roughly the same. A credit score below 680 usually gets you the most loan options. However, you will pay a higher interest rate than if you have a 780 credit score or more.

Jumbo loans are more strict than conforming when it comes to money left after loan closure -- also known as reserves or post-closing liquidity. Jumbo lenders typically require 12 months of liquid reserves, half in a savings or checking account and the other half from retirement assets. The conforming loan reserve requirements vary depending on credit score, downpayment, and DTI. They can range from 0-12 months. If your debt-to-income ratio is low or your down payment high, jumbo exceptions may be available.

Jumbo loans have more flexibility than conforming loans

• Higher debt-to-income ratio:

  Lenders will typically require that your monthly housing payment and all other bills not exceed 43 percent of your income for conforming loans with 20% down or more. Non-conforming loans are possible to get some flexibility. If you have substantial cash reserves that were not exhausted by the loan closing, you may be eligible for a jumbo loan. This loan will have a higher debt-to-income ratio than 43 percent.

• Flexible income calculation:

  Jumbo income calculations are more straightforward than conforming. If you have been in the same industry for 15+ years, and you recently started your own company in that sector, a conforming loan will require you to provide two years' worth of self-employed tax returns. If you can prove that your business is stable or growing, a jumbo loan may only need one year of returns.

• With no mortgage insurance, less than 20% down:

  Jumbo loans may require a down payment of as low as 10% for amounts up to $1 million. Sometimes, this can translate into a purchase price of $1.1 million or less. Contrary to conforming loans, these low-down programs for jumbo don't always need down payments. Mortgage insurance. This flexibility comes at the cost of lenders offering a rate about .25% higher and requiring a 30- to 36 percent debt-to-income ratio for low-down jumbos.

What Is The Difference Between Jumbo Rates And Conforming Rates?

Jumbo loans had rates that were at least. Twenty-five percent was higher than conforming loans before 2008's financial crisis. This was because jumbo lenders were seen as taking a greater risk by making loans that could not be sold to the government-backed Fannie Mae or Freddie Mac. This increased risk resulted in higher consumer rates.

Federal regulations have had a significant impact on rate markets over the years since the financial crisis. Banks were able to maintain jumbo rates at the same level as conforming rates in the years that followed.

This dynamic is subject to change, so make sure you ask your lender for comparisons.