Are you looking to buy a high-priced or luxury home? Do you have a lower debt-to-income ratio, a higher credit score and a larger down payment? Then a jumbo loan is just right for you.
What is a jumbo loan?
Also called a non-conforming mortgage, a jumbo loan is a loan that does not conform to the guidelines of Fannie Mae and Freddie Mac. These two institutions were created in 1938 and 1970 respectively. They provide stability and affordability to the mortgage market by buying conforming mortgages from lenders. This way, lenders get more liquidity to make even more mortgages.
Fannie Mae and Freddie Mac only buy mortgages meeting their guidelines for down payment, credit score, post-closing reserves, and loan amount. The conforming loan size limit for a one-unit home in 2016 is $417,000, in most areas of the country. There are, however, some exceptions as high as $625,000 in certain high-cost areas of the United States. The loans that exceed these limits are called jumbo loans.
How to qualify for a jumbo loan?
Before you look to get a jumbo, you need to make sure that you can get one. Like I mentioned before, in most of the country the conforming loan size limit is $417,000. So any amount greater than that is a jumbo loan. But don’t forget about those high-cost areas. You can check the website of the Federal Housing Finance Agency to see your area’s loan limits and you should also talk to your lender.
Qualifying for a jumbo loan is the same as qualifying for a conforming loan. Your lender will look at your credit score, debt-to-income ratio, the size of the down payment and the money left after closing. A credit score of over 680 will get you most available loan options. But, if you want the best rates, you need to have a credit score of at least 780.
Things are a little different when it comes to the money left after closing. With jumbo loans, lenders want to see 12 months of reserves after the close, half liquid and half calculate from retirement assets.
What about jumbo loan rates?
Before the last financial crisis, jumbo loans had rates at least 0.25% higher than the rates that came with conforming loans. This was because lenders were taking more risk by offering loans that could not be sold to Fannie Mae or Freddie Mac.
However, things changed after the financial crisis passed. Federal regulations changed rates in such a way that banks can now keep jumbo rates at the same level as conforming rates.