Are you looking for the definition of jumbo loans? This type of loan can help you finance the purchase of a home that costs more than the loan limits typically considered allowable for a conventional or FHA mortgage loan.
Understanding the Definition of Jumbo Loans
Whether you are trying to purchase a house in an area where property tends to be very expensive or if you are purchasing an upscale dream home, the house you want to purchase might cost more than it's possible to finance through a "conforming" loan. In that case, pursuing a jumbo loan might be the best option for financing the property that you want to purchase.
Conforming Loans
To understand what a jumbo loan is, you must first understand what a conforming loan is. A conforming mortgage is one that is for an amount equal to or lower than the maximum amount that Fannie Mae or Freddie Mac can purchase. The conforming loan limit varies based on a variety of factors, including the cost of living where the property is located and whether the property is a single family dwelling or if it is intended to provide housing for multiple families.
The limit for conforming loans was increased in 2008 per terms established by the Housing and Economic Recovery Act of 2008 (HERA), allowing borrowers in the highest cost of living areas to borrow as much as $729,750 to finance the purchase of a single family home.
The limits were changed the following year per the American Recovery and Reinvestment Act of 2009 (ARRA) and will be reassessed annually based on housing costs and economic conditions. For details about the current maximum, see the Conforming Loan Limit page on the Federal Housing Finance Agency (FHFA) website.
Jumbo Loans
Jumbo loans are mortgages that can be approved for amounts that exceed established limits for conforming loans. If you are able to qualify for a jumbo loan, you may be able to finance the purchase of your dream home even if you do not have access to enough cash to make a down payment large enough to reduce your financing need to the maximum amount allowed for a conforming loan. However, qualifying for a jumbo loan is no easy matter.
While the exact criteria required to qualify for a jumbo loan may vary from one lender to another, individuals who hope to qualify for this type of loan program can expect to be held to extremely stringent credit and income-to-debt qualification criteria, and to be required to make a significant down payment out of their own money.
Typical jumbo loan qualification criteria include:
- Credit score of 720 or higher
- Minimum down payment requirement of 20 percent
- Documented proof of income
- Debt to income ratio lower than 38 percent
Seeking a Jumbo Mortgage
If you are interested in obtaining a jumbo loan, be prepared to spend a good bit of time shopping around for lenders who are willing to underwrite these types of loans. In the wake of the real estate crisis that hit in 2007, many lenders decided to get out of the business of writing such sizeable loans because of the risk. Those that did stay in the jumbo loan market moved away from the practice of making such large loans to people who could only make small down payments or could not provide documentation of their earnings and ability to repay the loan.
Be prepared to go through an extensive application and screening process. Interest rates and qualification criteria are likely to vary from one lender to another. You may find that working with a mortgage broker is the most efficient way to identify the best jumbo loan program for your particular situation.
A Word of Caution
Purchasing a home at any price is a serious decision that should not be made without careful consideration. Before you seek to finance a home with a price tag high enough to send you searching for a jumbo loan, think long and hard about whether or not you truly have the financial means to afford the purchase you are considering making.
No one wants to think about the possibility of a worst case scenario, but it's something that everyone who is committing to a long term mortgage loan should consider. Rather than focusing solely on the definition of jumbo loans, consider the very real financial implications of borrowing this much money. Only proceed with the transaction if you are certain that the real estate purchase you are considering making is truly in your long-term best interests, as well as those of your family members.
