The term "jumbo mortgage" is a more common name for a type of "nonconforming loan." It's not terribly different from most mortgages, but the small differences can mean the world if a jumbo mortgage is the right option for you! To understand jumbo loans, we first need understand conforming loans. The term is used to describe the loans that conform to the standards set by Fannie Mae and Freddie Mac, government sponsored enterprises that purchase the bulk of U.S. mortgages from lenders and banks. These two enterprises set a standard that limits the maximum value of any individual mortgage they will purchase. For the sake of clarity, Fannie Mae and Freddie Mac purchase mortgages from lenders and banks so the smaller institutions can have more liquidity (and offer more loans). With the set standard, the banks and lenders tend to conform because they want the two larger enterprises to purchase the loans. These loans are considering "conforming loans" because they meet the standard - currently set (for 2018) at $453,100 for single-unit homes. Some "high cost" markets (like New York or Los Angeles) will have a higher standard amount, and these standards can vary from county to county. You can learn more about these limits on the Federal Housing Finance Agency website. Be sure to watch this video explaining some of the conforming limits for 2018!
So, loans that exceed the standard amount are considered "nonconforming" - and are more commonly referred to as "jumbo loans" or "jumbo mortgages." These types of loans are generally used to higher priced, luxury homes - or homes in highly competitive real estate markets.
These loans function like traditional mortgages, but will likely have slightly tighter restrictions. Like other types of nontraditional mortgages, these qualifying requirements are to ensure the borrower's ability to repay, as well as protect the lender from risk. Most jumbo mortgages are going to require a FICO credit score of 740 or higher and a debt-to-income ratio of 45% or better. Depending on the lender, the debt-to-income ratio may need to be as low as 35%.
Qualifying is similar to the process of other mortgages, though the large amount of the loan may require a borrower to produce even more documentation than normal. For self-employed borrowers, this may include two years' tax returns, bank statements, and even proof of assets.
Fortunately, jumbo mortgages are increasingly available, with steadily improving interest rates and more stability than in years past. If you're looking to purchase a home valued at more than half a million dollars, a jumbo mortgage may be just right for you! As always, explore lenders to find rates and options that fit with your unique scenario, and spend the time to get all of your financial information in order to make the process even easier!
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