Jumbo Loans 101

When you’re starting the home buying process and get to the financial aspect, it doesn’t take long to realize that there are actually many different kinds of mortgages out available. One type of mortgage that doesn’t get too much press are jumbo loans, which are exactly what they sound like: a loan with a high balance.

Most mortgages are conforming loans, meaning they meet certain criteria established by Fannie Mae and Freddie Mac. The criteria set by Fannie Mae and Freddie Mac include a maximum loan amount. Some counties are designated as high-cost areas, where the maximum conforming loan amount is higher.

In the 48 contiguous states, the loan limit for a conforming mortgage for a single-family dwelling is $417,000. In high-cost areas, the maximum amount for a conforming high-balance mortgage is $625,500. In Hawaii, Alaska, Guam, and the U.S. Virgin Islands, the conforming loan limit is $625,500, and the conforming high-balance limit is $938,250. Mortgages that exceed the conforming loan limit (or the conforming higher balance limit in high-cost areas) are considered jumbo mortgages.

Why Jumbo Loans?

Jumbo mortgages are usually to purchase luxury residences, and are thought to pose a higher risk to lenders than conforming mortgages since the value of luxury properties may fluctuate more due to market conditions, and they may be harder to sell in the event of borrower default. However, the housing bubble in the mid-2000’s occurred in part because lenders readily granted jumbo mortgages to borrowers by failing to verify income and requiring low down payments. Many of those borrowers eventually could not afford their payments and defaulted, and many lenders stopped offering jumbo mortgages.

Since then, requirements to qualify for a jumbo mortgage have been more strictly enforced, and most lenders again offer jumbo mortgages. Because of the higher risk posed by jumbo mortgages, they have traditionally carried higher interest rates than conforming mortgages, although recently rates are sometimes lower for jumbo mortgages than conforming loans. Additionally, lenders usually require a down payment for jumbo mortgages of at least twenty percent. In determining whether to approve a jumbo mortgage, lenders will also look for a low debt-to-income ratio (i.e., a monthly payment that is less than a certain percentage of your monthly income) and a high credit score.

Jumbo mortgages are usually offered as adjustable rate mortgages, or ARMS, which have a fixed rate for a certain number of years at the start of the mortgage and a rate that adjusts annually after the fixed rate has expired, although some lenders may offer fixed-rate jumbo mortgages. Some banks offer jumbo mortgages just for primary residences, while others also offer them for secondary or vacation homes, and investment properties.