Jumbo Loan

A jumbo loan is a type of mortgage where the loan amount exceeds the Federal Housing Finance Agency (FHFA) conforming loan limits followed by government-sponsored entities like Fannie Mae and Freddie Mac. Such loans are used to finance expensive properties.

The bank's jumbo mortgage originations are directly proportional to increases in its holdings of liquid assets and a decrease in its cost of raising deposits. Furthermore, Jumbo mortgages are treated as illiquid loans, and Fannie Mae and Freddie Mac will not purchase or securitize mortgages above the jumbo mortgage cut-off.

• Jumbo loans refer to the loan of a considerable amount used to buy expensive properties. Such amounts are greater than the conforming loan limit followed by Fannie Mae and Freddie Mac.
• It is also a non-conforming loan and manifests features like high down payment and interest rates.
• It is hard to qualify for a jumbo loan amount due to stringent qualifying criteria like excellent credit score, low debt to income ratio, consistent income, and adequate cash reserves.
• The general conforming loan limit for 2021 is $548,250, and it varies by county.

Jumbo or non-conforming loan features a high down payment and strict underwriting rules than a conforming loan or standard mortgage. People make use of it when they desire to purchase a high-end property. But, at the same time, they are in short of the required amount to buy it, and the amount is multiple times greater than the conforming loan limit set by FHFA so, if people want to obtain a heavy loan amount greater than the conforming loan limit they have to turn to a non-conforming loan.

Adjustable and fixed interest rate jumbo mortgages are available. It is mainly used for buying principal residences, second or vacation houses, or investment properties with a huge price tag or in the best streets. However, jumbo mortgages are riskier to lenders since it is not secured by GSEs like Fannie Mae and Freddie Mac. Hence, the lenders will have a challenging phase if borrowers fail to repay.

The considerable size of jumbo mortgages substantiated its high rates, which is above the conforming loan rate. It was the scenario before and during the financial crisis in the USA. When the market stagnated during the credit crisis, most financial institutions quit producing new jumbo mortgages. After a significant period, jumbo mortgages have resurfaced to the mortgage market after nearly vanishing in the aftermath of the 2008 economic crisis and real estate crash. The jumbo rates started decreasing afterward; it even reached a level where the rates were lower than the conforming loan rates. One of the reasons for the fall in rate may be the increased supply of jumbo mortgages.

Furthermore, factors like borrower's institution, borrower's financial position- credit score, low debt-to-income ratio, income, reserves, down payment, and market scenario influence the jumbo loan interest rate offered. Therefore, some areas with high property prices will have different jumbo rates than homes in less high-profile neighborhoods.

Jumbo mortgages and non-jumbo mortgages cater to the illiquid segment and liquid segment of the U.S mortgage market, respectively. Mortgages value crossing the conforming loan limit are treated as jumbo loans.

• Conforming loan limit 2020 for single-unit properties: $510,400 ($765,000 for high-cost areas)
• Conforming loan limit 2021 for single-unit properties: $548,250 ($822,375 for high-cost areas)
• Conforming loan limit 2022 for single-unit properties: $647,200 ($970,800 for high-cost areas)

In the United States, the conforming loan limit varies between counties. For example, looking into the jumbo loan Virginia data for the year 2021, it is evident that most counties' conforming loan limit is $548,250 whereas, in some counties like Madison and Stafford, it is $822,375.

Qualifying for a jumbo mortgage is a complicated process. To qualify, the borrower must satisfy several requirements specified by the lender. It is usually more stringent compared to regular mortgages. Some of the major requirements include:

• Credit score: The credit score needed to get a Jumbo mortgage is usually higher than that required for a regular mortgage. A good credit score usually revolves around 700. However, it may vary based on the lender and property type.
• Debt-to-income ratio: Borrowers might earn a lot but also have large debts as well, leaving them with very little money for mortgage payments. For Jumbo mortgages, the preferable Debt-to-income ratio is below 43%. It reveals the repayment capacity of the borrower.
• Down payment: Down payment requirement usually varies by lender. Generally, it ranges from 10% to 15%. When the down payment is below 20%, more stringent will be the other qualifying requirements.
• Cash reserves: The lender needs to be confident that the borrower will make mortgage payments for at least a few months. As a result, borrowers have to prove the possession of adequate cash reserves.
• Consistent income: Lenders prefer rich or people with constant income flow as jumbo mortgage borrowers.
• Income and asset documentation: The documentation for a jumbo mortgage must include proof of income and assets.
• Others: Depending on various factors, lenders may demand borrowers obtain more qualifications like mortgage insurance for the property and occupancy restrictions.

There are several noticeable differences between Jumbo and conventional mortgages. Some of them are the following:

• Secured by: Conventional mortgages are secured by Fannie Mae and Freddie Mac, whereas Jumbo mortgages are not.
• Stringent requirements: For people, a bunch of qualifying requirements like down payment, credit score, mortgage insurance, and debt to income ratio for jumbo mortgages is challenging to meet compared to conventional mortgage requirements. For example, a jumbo mortgage requires adequate cash reserve, whereas a limited reserve is acceptable for getting a traditional mortgage.
• Property type: Jumbo mortgages are for purchasing luxury properties in the best areas, unlike conventional mortgages.
• Mortgage limit: GSEs update the limit for conventional mortgages, whereas jumbo mortgages have no fixed upper limit.

This has been a Guide to what Jumbo Loan is & its Definition. Here we explain how Jumbo Loans work, limits in 2020-21, requirements, rates etc. You can learn more from the following articles –

• Certificate of Deposit
• Tranches
• Non-Conforming Loan