House prices in multiple areas in the U.S. continue to spike up, which is why home buyers are looking for alternative loan options as regular mortgages are no longer enough to finance their dream home. That’s where jumbo mortgages come into play, which covers for loans that exceed the limits set the by the enterprises in the housing market.
What is a Jumbo Mortgage?
Jumbo mortgages refer to any loans that are larger than the standard loan limits set by government-sponsored enterprises like Fannie Mae and Freddie Mac. Lenders are often at higher risk since jumbo loans are not backed up by a government agency and enterprises, which means that qualifying for one can be a tricky ordeal.
Jumbo vs. Conventional Loans
Both jumbo loans and conventional loans are not insured by a government agency, which means that it is run by private lenders. The primary difference is that conventional loans meet the standard limit amount set by government-sponsored agencies, while jumbo loans are not supported by Fannie Mae and Freddie Mac as it exceeds their conforming limits.
That means that it is up to the private lenders’ discretion to set their own regulations when issuing a jumbo loan to borrowers.
How Does a Jumbo Loan Work?
Jumbo loans are not something you apply for like conventional loans. Instead, you need to apply for a mortgage loan, but once the amount exceeds the government’s agreed limits, it is up to the lender to decide the amount of loan they can lend without any backing from government agencies.
Seeing as jumbo loans are kept on the lender’s own books, some also call it portfolio loans. Either way, lenders will conduct a strict evaluation on the borrower’s credit scores, debt-to-income ratios, and liquid assets.
Lenders also consider qualifying limits on student loans, minimum monthly credit card payments and other monthly expenses such as the property taxes, utility bills, tuition, groceries, and more. Seeing as jumbo loans are not securitized by Fannie Mae or Freddie Mac, it’s no surprise that borrowers will have to settle with higher rates.
Just like any other loans, the monthly payments largely depend on three factors:
- The dollar amount of the loan
- The years on the term
- Interest rates
Meanwhile, the requirements to pass a jumbo loan includes the following:
- Good or exceptional credit score of at least 700 to 720
- Low debt-to-income ratio
- At least two years of steady employment
- Proof of income
- Low loan-to-value ratio
- Higher minimum down payment
- Meet jumbo loan limits
- Enough jumbo loan cash reserves
When determining whether you should consider a jumbo loan, you need to look at the amount you need to borrow and not the total price of the house. Qualifying for a jumbo loan doesn’t mean it’s in your best interest to apply for one as it often comes with higher interest rates.
Conclusion: Jumbo Mortgages as an Alternative When Other Loans Fall Short
When regular mortgages fall short, jumbo loans are the best option that allows even first-time homebuyers to buy the home of their dreams. It is also the easier choice compared to a conforming loan as you don’t have to piggy-back multiple mortgages at the same time, allowing you more flexibility when buying a home.