A jumbo loan or jumbo mortgage is a type of home financing that exceeds limits set by the FHFA (Federal Housing Finance Agency). Different from conventional mortgages, jumbo loans are not eligible for purchase, guarantee, or secured by Freddie Mac or Fannie Mae. It is designed to finance homes and luxury properties in highly competitive real estate markets, and thus come with unique Tax implications and underwriting requirements. Jumbo mortgages have gained lots of traction over the years following the housing market’s recovery from the Great Recession.
The value or amount of jumbo loans varies by county and/or state. A conforming loan limit is set by the FHFA, covering different areas on an annual basis, although changes to these limits are quite infrequent. Counties with higher home values also have a higher baseline limit (often up to 150% of the basic limit). Different sets of provisions apply to areas outside continental US such as Hawaii, Guam, Alaska, and the USVI.
How do Jumbo Loans Work?
If your heart is set on a house that costs close to or more than half a million dollars, and you don’t have as much sitting in your bank account, a jumbo mortgage must be in order. However, you may face a much more rigorous process in terms of meeting credit requirements compared to a conventional loan. This is because a jumbo mortgage carries a lot more credit risk for lenders, with the loan being outside of Freddie Mac or Fannie Mae guarantee. More risk is also present because there’s more money involved.
Requirements for a jumbo loan have also become more stringent over the years. To get an approval, you will need a credit score of 70 to 700 and a low DTI or debt to income ratio and while jumbo loans are non-conforming mortgages, they still must fall within the guidelines of what the CFPB (Consumer Financial Protection Bureau) considers to be a qualified mortgage.