Maybe you have seen it on a mortgage rate table, or heard it in passing, but the question remains what is a Jumbo Mortgage? Is it like a jumbo candy bar and just used to describe mortgages over a certain dollar amount or is there more to it? Would you even want one?
A jumbo mortgage is the equivalent of a jumbo candy bar. It is a mortgage larger than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). This means that your loan can not be purchased by or insured by Fannie Mae or Freddie Mac. The conforming loan limits can differ from state to state and even by county. The limit is set by the average home price in the United States, and then also considering the average home price in the specified county. If the area has 115% of the local median home values over the baseline ($548,250) the limit will be set higher up to a Max limit of 150% of the baseline loan limit ($822,375). For example, according to the FHFA website the conforming loan limit for Bristol County, MA is $548,250 while Plymouth County, MA is $724,500. There will also be no county with a limit higher than $822,375, no matter how expensive the area is.
Since these loans are not insured by Fannie Mae or Freddie Mac, the requirements to qualify for them are significantly more strict than conforming loans. Borrowers must have a higher credit score, lower debt-to-income (DTI) ratio, and significant savings. Typically, a borrower will need a credit score over 700, have a DTI ratio of 43% or lower, some lenders will require a DTI of less than 36%, a down payment of 10% – 30%, and accessible savings to cover to cover payments for a certain period, typically 6 months.
These loans are not much different from conforming loans with typically only slightly higher rates with similar payback periods. However, due to the higher risk of the loan not all financial lenders will take applications for such a loan. They are also more difficult to qualify for if you don’t meet the requirements exactly and if you are self-employed.
Someone who might take out one of these loans, is an individual looking to purchase a luxury home. They would have a higher-than-average income who is financially stable but not enough so to purchase the home outright. Keep in mind that with a Jumbo loan over $750,000 you can only deduct the interest on the first $750,000 and not the full loan amount. This is from the tax regulation changes in the “Tax Cuts and Jobs Act” in 2017.
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