What is a Jumbo Loan?

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.

Key Takeaways

  • 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.

How Does Jumbo Loan Work?

Jumbo or non-conforming loan features a high down paymentDown PaymentDown payment is the initial deposit made by the buyer to the seller when purchasing an expensive item, such as residential property or a car. It comprises a portion of the total purchase amount of the asset and takes place via cash, bank check, credit card, or online banking. read more 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.

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Adjustable and fixed interest rate jumbo mortgages are available. It is mainly used for buying principal residences, second or vacation houses, or investment propertiesInvestment PropertiesInvestment property refers to the real estate acquired to earn returns on the investment through rental income, royalties, dividends or future appreciation, usually in the name of an individual investor, a group of investors or an investment company for a short-term or a long-term investment.read more 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 MaeFannie MaeFannie Mae, i.e., Federal National Mortgage Association is a United States government-sponsored enterprise (GSE) which was founded in the year 1938 by congress to boost the secondary mortgage market during the great depression which involves financing for the mortgage lenders thereby providing access to affordable mortgage financing in all the markets at all times.read more and Freddie Mac. Hence, the lenders will have a challenging phase if borrowers fail to repay.

Jumbo Loan Rates

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 crisisFinancial CrisisThe term “financial crisis” refers to a situation in which the market’s key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more in the USA. When the market stagnated during the credit crisis, most financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more 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.

Limit of Jumbo Loan 2020-21

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.

Requirements

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.

Jumbo Loan vs Conventional Loan

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 ratioDebt To Income RatioThe Debt to Income (DTI) ratio measures the ability of an individual or entity to pay back their debt or installments easily without any financial struggle.read more 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 –

As announced by FHFA, the jumbo mortgage bandwidth for 2022 is between $647 200 and $970 800. The non-jumbo mortgage cut-off of $647 200 accounts for an 18% annual increase based on the 2021 cut-off of $548 250.

Jumbo mortgages or the non-conforming conventional mortgages are deemed harder for lending institutions since they cannot be secured by Fannie Mae or Freddie Mac, which means the institutions are not shielded from liabilities if a client fails to repay. Furthermore, a jumbo mortgage often has a premium interest rate, stricter underwriting guidelines, and a greater down payment than a standard mortgage.

The Federal Housing Finance Agency increased the conforming loan cut-off for a single-family house from $510,400 in 2020 to $548,250 in 2021. In addition, the conventional loan limit is capped at 150 percent of the maximum in high-cost locations, or $822,375 in 2021.

  • Certificate of DepositTranchesNon-Conforming Loan