Jumbo Loans: What You Can (And Can’t) Buy

Jumbo mortgages, also known as non-conforming mortgages, are home loans that exceed Fannie Mae and Freddie Mac’s conforming loan limit. In most U.S. locations, that means a loan amount higher than $417,000. However, in higher-income areas, a jumbo loan starts at $625,500, and for multi-family homes, they can start even higher.

Until recently, fewer lenders were willing to make jumbo loans. As a result, jumbo loan seekers would likely to have had to pay a higher cost to compensate lenders for the risk of holding onto the jumbo loan.

That is a less likely case today as more lender groups have been pooling jumbo mortgages together into mortgage-backed securities and selling them off to investors. This process is called securitization and as far as the customer is concerned, this process allows you to get a jumbo loan at a reduced cost.

One additional impact of the financial crisis that has yet to be sufficiently addressed, in regards to jumbo loans, is the gap between the value and selling price for some properties. This is driven by the overvalued loans held by current owners who lost value on their properties during the crisis. If you are looking for a jumbo loan on a property where the current loan to value ratio is skewed, you should be prepared to bring a substantial amount of cash to the table at closing.

If that doesn’t scare you, you will also need to have a low debt-to-income ratio. You’ll have to be able to comfortably to pay the principal, interest, taxes and insurance on your jumbo loan each month. As a rule, your monthly mortgage payment on a jumbo loan should not exceed 38 percent of your pre-tax income. Be aware that you will typically need to present two years worth of fully documented income history.

You will also need a good credit score to qualify for a jumbo mortgage. Minimum scores vary by lender but in all cases you should expect to need a score of at least 720. Lenders will look at credit reports from all three major credit bureaus, so any history of missed payments is sure to impact your ability to qualify.

It is rare to find a lender who will accept less than 20 percent of the home cost as a down payment. Again, this is due to the risk lenders take on, and down payment requirements for jumbo loans are strict. Many lenders expect at least 30 percent, especially for very expensive properties.

While each lender is different, many will not offer jumbo loans on vacation homes and investment properties, something to keep in mind in case that is what you are looking to purchase. Refinancing a jumbo loan can be a problem in a weak economy, as well. If the value of your property falls, you may suddenly find that you no longer have 20 percent equity in place, even with the payments you’ve made since securing the original loan.

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