Chances are, you know a little something about mortgages. But have you heard about their big brother, the jumbo mortgage?
A jumbo mortgage — also known as a jumbo home loan — might sound expensive and downright financially daunting, but it’s not nearly as intimidating as it sounds.
A jumbo loan is simply a big home loan.
Still, you might be asking yourself, “What makes it jumbo?” Or, “How is a jumbo loan different from a regular mortgage?”
Read on for the basics on jumbo home loans so when you’re ready to purchase a house, you’ll feel at ease knowing all your options.
The Meaning of Jumbo
First, a quick review. A traditional mortgage, or a conforming loan is a loan given by banks and financial institutions, such as Ally Bank, that’s used to finance the purchase of a house. You pay off this loan over a specified amount of time (for example a 10- or 30-year term) by making a monthly mortgage payment (which usually consists of the loan principal, interest, taxes, and insurance).
With a jumbo home loan, the same basic definition applies. The main difference between a mortgage and a jumbo mortgage is — you guessed it — more money. A jumbo mortgage is literally a home loan that’s larger than a traditional mortgage.
Who determines whether a mortgage is jumbo or not?
A mortgage is classified as jumbo when the amount of money loaned exceeds the limitations set by government institutions Fannie Mae (The Federal National Mortgage Association), Freddie Mac (The Federal Home Loan Mortgage Corporation), the Federal Housing Administration (FHA), or the U.S. Department of Veteran’s Affairs (VA).
That means as of 2019, if you need to borrow more than $484,350 for a one-unit property, or $726,525 in a high-cost area, you will typically need to apply for a jumbo mortgage.
A jumbo responsibility? Not necessarily.
Along with the added cost of a jumbo loan comes additional requirements.
Traditional loans are backed by Fannie Mae and Freddie Mac, but jumbo loans aren’t. (In other words, Fannie and Freddie do not buy jumbo loans from lenders and package them into what’s called mortgage-backed securities, which is what they do with conforming mortgages.)
Because of this, lenders tend to view jumbo loans as riskier and typically have stricter borrowing guidelines.
Generally, the ideal borrower for a jumbo loan should meet three common lending requirements: a higher credit score, a larger income, and greater reserves (a.k.a. money in the bank).
Ideally, jumbo borrowers have a credit score above 700. If yours doesn’t quite meet the mark, don’t fret. It’s not a guarantee that you’ll be rejected for a jumbo mortgage. But you’ll likely need to have a low debt-to-income ratio (that’s your existing monthly debt payments plus your hypothetical new mortgage payment, divided by your gross monthly income) to demonstrate that you can manage the monthly payment and afford to pay back a more expensive loan.
Above all that, you also need to have enough money set aside for a down payment, which can range from 10 to 20 percent depending on the lender and the loan.
Traditional mortgage borrowers can often put down a smaller percentage in exchange for paying private mortgage insurance, but that’s usually not an option made available to jumbo borrowers.
As the housing market shifts and prices rise, a jumbo loan may be your best option if you’re hoping to purchase a more expensive home. It allows you to borrow more than you could with a traditional home loan.
With a jumbo mortgage, you can typically avoid applying for two separate conforming loans. A jumbo loan can also help you avoid dipping into your long-term retirement savings or investments to make a down payment that meets your lender’s requirements.
And because jumbo loan programs aren’t restricted by Fannie, Freddie, FHA, or VA guidelines, you could have the ability to choose amongst a wider variety of lending programs.
But remember that in exchange, you need to have better credit and more savings for a large down payment.
Whether you’re buying your first home in an expensive housing market or are looking to upgrade from your current home, a jumbo loan could be the right financing option for you. Yes, this type of mortgage has several additional requirements, but if you’re willing to save and carefully manage your money, a jumbo loan can help you move into the house of your dreams