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  • jumbo loan, also known as a jumbo mortgage, is a form of home financing for whose amount exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). As a result, unlike conventional mortgages, it is not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMAand FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". Traditionally, the interest rates on jumbo mortgages are higher than for conforming mortgages, however with GSE fees increasing, Jumbo loans have recently seen lower interest rates than conforming loans

  • Risk

    Jumbo mortgage loans are a higher risk for lenders, mainly due to their larger size rather than credit quality.[1] This is because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows in some cases. That is one reason lenders prefer to have a higher down payment from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.

    Cost 

    The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the higher risk to the lender. The spread, or difference between the two rates, depends on the current market price of risk. While typically the spread fluctuates between 0.25 and 0.5%, at times of high investor anxiety, such as August 2007, it can exceed one and a half percentage points. It can be more expensive to refinance a jumbo loan due to the closing costs. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. In other cases, title insurance companies will offer up to a 50% discount, often required by law for those refinancing within 1 year to 10 years. The largest discount is for refinancing within one year.

     

    Qualifying for a Jumbo Mortgage

    If you have your sights set on a home that costs close to half a million or more – and you don't have that much sitting in a bank account – you're probably going to require a jumbo mortgage. And if you’re trying to land one, you’ll face much more rigorous credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender, due to their lack of a Fannie Mae or Freddie Mac guarantee, as mentioned above. And, of course, because more money is involved.

    As with mortgages in general, minimum requirements for a jumbo have gotten increasingly stringent since 2008. To get approved, you’ll need a stellar credit score – 700 and above —and a super-low debt-to-income (DTI) ratio – under 43%, at least, and preferably closer to 36%. Although they’re nonconforming mortgages, jumbos often still must fall within the guidelines of what the Consumer Financial Protection Bureau considers a “qualified mortgage,” a lending system with standardized terms and rules, such as the 43% DTI.

    You’ll need to prove you have accessible cash on hand to cover your jumbo mortgage payments, which are likely to be very high if you opt for a standard 30-year fixed-rate mortgage. Specific income levels and reserves depend on the size of the overall loan, but all borrowers need pay stubs dating back 30 days and W2 tax forms stretching back two years. If you're self-employed, the income requirements are greater: two years of tax returns and at least 60 days of current bank statements. The borrower also needs to prove that he or she has the liquid assets to qualify and cash reserves equal to six months of the mortgage payments.

    And all applicants have to show proper documentation on all other loans held and proof of ownership of nonliquid assets, like other real estate.

    How much you can ultimately borrow depends, of course, on your assets, your credit score and the value of the property you're interested in buying (for further information, see Too Much Debt for a Mortgage?).

    Jumbo Loan Rates

    On the bright side, while jumbo mortgages used to carry higher interest rates than conventional mortgages (because of the larger amount of money involved and because it can take longer to sell a higher-priced home if the lender must foreclose), that gap has been closing in recent years. Today, the average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages — and in some cases, actually lower. Otherwise, banks may charge from 0.25% to 1.5% more interest on a jumbo loan.

    Even though the government-sponsored enterprises can't handle them, jumbo loans are often securitized by other financial institutions; since these securities carry more risk, they trade at a yield premium to conventional securitized mortgages. However, of late this spread has been reduced, with the interest rate of the loans themselves.


    Down Payment on Jumbo Loans

    On the even brighter side, down payment requirements have loosened over the same time period. In the past, jumbo mortgage lenders often required home buyers to put up 30% of the residence's purchase price (compared to 20% in conventional mortgages). Now, that figure has fallen as low as 10% to 15%. (Bear in mind, though, there can be various advantages to making a higher down payment – among them, to avoid the cost of private mortgage insurance: See Private Mortgage Insurance: Avoid It for These 6 Reasons).

    You could attribute all these low rates for interest and down payments to the fact that banks are generally very eager to find new customers for their jumbo loan packages. Jumbo mortgage borrowers are likely to be, or are on the road to becoming, the sort of high net worth individuals institutions love to sign up for long-term products. Such clients have an excellent credit history, plenty of assets and, often, the need for additional wealth management and investment services down the road. Plus, it's more practical for a bank to administer a single $2 million mortgage than 10 $200,000 mortgages.

    Who Should Get a Jumbo Loan?

    These mortgages are considered most appropriate for a segment of high-income earners who make between $250,000 and $500,000 a year. This segment is known as HENRY, an acronym for "high earners, not rich yet,"; it refers to people who generally make a lot of money but don't have millions in extra cash or other assets accumulated – yet.