Jumbo loans are simply loans that are too large to be backed by Fannie Mae and Freddie Mac – the government-controlled businesses that buy mortgages from lenders and sell them to investors. The Federal Housing Finance Agency has established laws that restrict Fannie Mae and Freddie Mac to purchasing single-family mortgages below a specific amount, known as the “conforming loan limit.” Jumbo loans exceed this limit and therefore must be sold to investors on the private market, which increases the cost to borrowers.
In most areas of the United States, the conforming loan limit for a one-unit property is $417,000. The exceptions are Alaska, Hawaii, Guam, and the U.S. Virgin Islands, as well as certain counties in other states throughout the country, which have been designated high-cost areas with a limit of up to $625,500. These limits are higher for properties with additional units.
In addition to having a higher loan amount, there are other characteristics that make jumbo loans different from conforming, or conventional loans. These include:
- Interest rates. Since lenders consider jumbo loans to be a higher-risk than traditional mortgages, interest rates for jumbo loans are typically higher than conforming loans.
- Credit scores. In order to qualify for a jumbo loan, lenders usually require borrowers to have a minimum credit score of 660, which is higher than the 620 credit score requirement associated with conventional loans.
- Home equity. Jumbo refinance loan borrowers must have a minimum of 15 percent equity in their home.
- Financial reserves. The financial reserves required for jumbo loans are higher than they are for conventional loans. Lenders often require borrowers to have six months’ worth of reserves for a primary residence and 12 months’ worth of reserves for a secondary residence.
- Borrowers applying for jumbo loans must meet stricter income requirements.
To find out if you qualify for a jumbo loan, contact a Cliffco Mortgage representative today.