A jumbo mortgage, also known as a jumbo loan, is funding that exceeds the credit limits established by the Federal Real Estate Financing Agency (FHFA). Unlike regular mortgages, jumbo loans do not qualify for the purchase, guarantee, or securitization by Fannie or Freddie firms. These mortgages are designed to finance luxury homes and apartments in the highly competitive real estate markets; jumbo loans have unique tax implications and underwriting requirements. 

The Difference between Conforming Loan and Jumbo Loan

For 2019, in most regions of the United States, the conforming loan credit limit is near $484,350. In Alaska, Hawaii, certain United States territories, and specific counties in the 48 states, where home prices are exceptionally high, the limit can be as high as $ 726,525 or 150 % of the national standard. You can check the appropriate credit limit for all US counties on the FHFA website.

A home mortgage for an amount higher than the conforming loan limit is referred to as a jumbo loan. Jumbo mortgages are often accompanied by strict credit terms and even more rigorous financial analysis of applicants than traditional mortgages. 

Jumbo Loan: How It Works

To learn how a jumbo mortgage works, you need to understand the purpose of a “conforming loan” whose credit limit exceeds the jumbo loan.

The Federal Real Estate Financing Agency (FHFA), which oversees Freddie and Fannie mortgages, was developed during the Great Clinical depression. It aims to ensure loan creditors have enough money to lend to Americans who want to purchase a house. 

To this end, FHFA allows Freddie and Fannie to purchase loans from credit unions, banks, and other lending institutions. But only if such mortgages meet specific criteria to protect GSE in the event of a borrower’s default. 

One of those standards is that the home loans can’t exceed the adjusting finance limit, which the FHFA establishes annually for each US county. 

Freddie Mac and Fannie Mae combine their respective loan packages into financial instruments known as Mortgage-Backed Securities (MBS). This MBS helps local lenders buy and sell properties on the public market like stocks. GSE uses the proceeds from the sale of MBS to securitize and purchase more home mortgages. Mortgagers are using funds from the sale of Freddie and Fannie loans to provide more extension, and the process continues.

Credit rating and Jumbo loan requirements

The process for approving a candidate for a large loan may vary depending on the lender and applicant. Still, additional requirements for a standard mortgage loan may include:  

Higher Credit Ratings:

Many creditors require a 720 or higher FICO score for many large loans. Typically, they don’t accept scores below 660, while lenders may accept lower 600 scores for conforming mortgages. 

Large Down Payment:

Lenders can approve conventional mortgages with a 5% down payment and the inclusion of PMI. However, the issuers of these mortgages, typically jumbo loans, require a down payment of 20% or even 30%.

Additional property:

As a precaution against the possibility of defaulting on large loans, lending companies often require candidates to prove that they have sufficient savings or other liquid assets to cover loan costs for at least one year.

Higher interest charges:

The additional risk associated with non-conforming mortgages often pushes lenders to raise interest rates on large loans by 1-2 percentage points over the prevailing interest rates on regular loans.

Higher closing or transaction costs:

To cover the price of the more extensive confirmation process needed for big finances, lenders commonly charge a significant proportion of the purchase cost (i.e., more “points”) as a loan initiation fee.

When is it advisable to take a Jumbo loan?

Suppose you are shopping around to buy a luxury apartment or house with considerably more facilities than the average house in your area or country. In that case, a large loan may be the only option to finance your home. Looking for big finance makes sense if you have the financial resources needed to pass the extensive certification procedure. It includes a credit rating of about 700 or higher and sufficient liquid assets to cover 20% or more of the down payment, initiation fees, appraisals, and at least six months of loan payments.