Jumbo mortgages are simply home loans that exceed the limits set by the Federal Housing Finance Agency (FHFA). Loans larger than the FHFA limits are not eligible to be secured by government-sponsored agencies like Freddie Mac and Fannie Mae.
Although these agencies cannot secure jumbo home loans, they are often secured by other financial institutions. They can be included in mortgage investment pools, trading as high yield investments.
Jumbo Mortgage Characteristics
Jumbo mortgages are more complex than conventional home mortgages. Because they are not eligible to be secured by government-sponsored agencies, jumbo mortgages are considered more risky loans compared to FHA, USDA, and VA loans. As such, lenders tend to have more rigorous underwriting procedures with these loans.
FHFA limits for conforming loans vary based on the location and the year. Maximum loan amounts are adjusted each year to reflect current market conditions. A national maximum is provided annually, with location-specific changes in competitive markets with higher real estate price averages.
Homebuyers applying for a jumbo mortgage are subjected to stricter credit requirements and verification processes. Potential borrowers will likely need an excellent credit score and a low debt-to-income ratio to be considered. Sufficient and consistent cash flow must also be demonstrated to cover the higher monthly payments.
Most jumbo mortgages are structured as 30-year fixed-rate loans. They are amortized with equal monthly payments over the term of the loan.
Jumbo Mortgages vs. Conventional Mortgages
In most cases, jumbo mortgages are structured similarly to conventional mortgages. The difference is that they exceed the FHFA limitations and are therefore not secured by Fannie Mae or Freddie Mac. Although jumbo loans are often conventional loans, they cannot be conforming. This creates a higher level of risk for lenders.
Many jumbo loans are used in the context of purchasing a larger home or a home located in a more expensive area. Where home prices are more competitive, jumbo loans may be the only option for homebuyers to purchase certain types of homes.
Although they are considered higher risk mortgages than conforming mortgages, jumbo mortgages often have interest rates similar to conforming mortgages.
Borrowers are often required to make a down payment of 10 – 20% for a jumbo mortgage. However, a down payment of less than 20% could lead to the requirement of private mortgage insurance (PMI), increasing the monthly payment of the loan.
Related: Piggyback Mortgage
Borrowers need to be highly qualified to receive a jumbo loan, which can include considerable financial assets and high levels of income. Jumbo mortgages are ideal for borrowers who recently ascended to a higher income bracket and are beginning to build their assets, which may include a luxury home.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.