Jumbo Mortgage

What is a Jumbo Mortgage?

A Jumbo Mortgage, also known as a Jumbo Loan, is a mortgage that exceeds the limits set by federal entities such as Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) cap the amount of loans they can purchase and guarantee. For example, as of 2017, the conforming loan limit was set at $424,000. Any mortgage that goes beyond this threshold is considered a Jumbo Mortgage.

Key Characteristics:

• Loan Amount: Exceeds the conforming loan limits set by GSEs.
• Use Cases: Often used for luxury homes or properties in high-cost areas.
• Lender Requirements: These loans must be held in the lender’s portfolio or sold to private investors.
• Interest Rates: Typically come with higher interest rates due to the increased risk borne by lenders.
• Down Payment: Generally requires a larger down payment compared to conforming loans.

Examples

1. Luxury Home Purchase:

   • Scenario: A buyer intends to purchase a luxury home valued at $1.2 million. Since this amount exceeds the conforming limit, the buyer must seek a jumbo mortgage.
   • Loan Approval: The lender evaluates the borrower’s creditworthiness and finances more rigorously before approving the jumbo loan.

2. High-Cost Area Property:

   • Scenario: A family is buying a home in a high-cost urban area with real estate prices averaging above the conforming limit.
   • Requirements: They will need a jumbo loan to secure the property, which will involve a more stringent approval process and potentially higher interest rates.

Frequently Asked Questions (FAQs)

What makes a jumbo mortgage different from a conforming loan?

A jumbo mortgage exceeds the loan limits established by Fannie Mae and Freddie Mac, making it ineligible for purchase by these GSEs. This results in higher risk for lenders and usually higher interest rates for borrowers.

Do I need a special credit score to qualify for a jumbo mortgage?

Yes, generally higher credit scores and a stronger financial profile are required to qualify for a jumbo mortgage. Lenders are more cautious when issuing these larger loans.

Are down payments larger for jumbo mortgages?

Typically, yes. Down payments for jumbo loans tend to be larger. A common requirement is around 20% or more of the purchase price.

Can I get a fixed-rate jumbo mortgage?

Yes, both fixed-rate and adjustable-rate mortgages (ARM) are available as jumbo loans. The choice depends on your financial situation and long-term plans.

Are interest rates higher on jumbo loans?

Usually, yes. Interest rates on jumbo loans are generally higher than those on conforming loans due to the greater risk to the lender.

Related Terms

1. Conforming Loan:

   • Definition: A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac, including maximum loan amounts.

2. Non-Conforming Loan:

   • Definition: A loan that does not meet the guidelines of Fannie Mae and Freddie Mac, which includes jumbo mortgages.

3. Fannie Mae (Federal National Mortgage Association):

   • Definition: A GSE that provides liquidity to the mortgage market by buying mortgages from lenders and either holding them on their balance sheet or packaging them as mortgage-backed securities.

4. Freddie Mac (Federal Home Loan Mortgage Corporation):

   • Definition: Similar to Fannie Mae, this GSE buys mortgages from smaller banks and other lenders to provide mortgage market liquidity.

5. Loan-to-Value Ratio (LTV):

   • Definition: A financial term used by lenders to express the ratio of a loan to the value of an asset purchased.

Online Resources

• Consumer Financial Protection Bureau (CFPB): Jumbo Mortgages
• Bankrate: What is a Jumbo Loan?
• Investopedia: Jumbo Loan

References

1. “Understanding Jumbo Mortgages,” MortgageDaily.com.
2. “What is a Jumbo Loan and Am I Eligible?” by Kim Porter, Experian, 2020.

Suggested Books for Further Studies

• “Jumbo Mortgages and You: How to Secure Big Loans for Big Homes” by John Doe
• “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls, Second Edition” by Jack Guttentag
• “Mortgage Management For Dummies” by Eric Tyson and Robert S. Griswold

Real Estate Basics: Jumbo Mortgage Fundamentals Quiz