People who need to borrow money to buy a new home typically take out a conventional mortgage. If you want to purchase an expensive property, a conventional mortgage may not be able to provide the amount of money you need. In that case, you may want to consider a jumbo mortgage.
What is a Jumbo Loan?
Fannie Mae and Freddie Mac limit the amount that a customer may borrow through a conventional mortgage. A jumbo mortgage is a non-conforming loan that allows a homebuyer to borrow more than is typically allowed. The limit depends on location.
Some lenders only allow a jumbo mortgage to be used for a primary residence, while others will approve an application for a vacation home or investment property. In some cases, a second appraisal may be required.
Can You Qualify for a Jumbo Mortgage?
Jumbo loans can’t be guaranteed by Fannie Mae or Freddie Mac, which means a lender won’t be protected if a borrower doesn’t make the required payments. Since jumbo loans are riskier for lenders than conventional loans, the requirements for jumbo mortgages are more stringent.
Lenders set their own jumbo mortgage criteria. If you apply for a jumbo loan, a lender may request more documentation than it would for a conventional loan to make sure that you have a consistent income and will be able to afford the monthly payments.
Down payment requirements are typically higher for jumbo loans than for conventional mortgages. The percentage you have to put down may depend, in part, on your credit score. Minimum credit scores depend on the amount to be borrowed but are generally stricter for jumbo loans. Debt-to-income ratio guidelines are more stringent for jumbo loans than for conventional mortgages.
You may need reserves with enough money to cover 12 months or more of mortgage payments. The requirement may be lower if you have a large down payment, high credit score and low debt-to-income ratio. A lender may count a percentage of your retirement savings as reserves.
A jumbo loan may have a fixed or adjustable interest rate. Rates for jumbo loans are typically close to those for conventional loans. Jumbo mortgages generally have higher closing costs.
Is a Jumbo Loan Right for You?
If you live in an area where home prices are high in general, or if you live in a place where houses are more affordable overall, but you want to buy an expensive property, a jumbo mortgage can help you get the home of your dreams. It can be risky, though. The payments may be a stretch, so you should be sure that your finances are in order, your job is secure and the house you want to buy is worth it before you consider taking out a jumbo mortgage.