Jumbo Loans 101

Since this is a 101 about jumbo loans and when you should use one, let’s start with the basics. A jumbo loan can also be referred to as a non-conforming mortgage. This is a loan that does not conform to the guidelines of Frannie Mae and Freddie Mac. Created by Congress in 1938 and 1970 respectively, Frannie Mae and Freddie Mac provide stability and affordability to the mortgage market by buying “conforming” mortgages from lenders, giving lenders liquidity to make more mortgages.

Frannie Mae and Freddie Mac only buy mortgages meeting their guidelines for down payment, credit score, post-closing reserves and loan amount. As of 2016, the conforming loan size limit for a one-unity home is $417,000 with exceptions as high as $625,500 in certain high-priced markets.

When should you use a jumbo mortgage?

You would use a jumbo mortgage when you are seeking a loan amount that is greater than the conforming loan limit in your area. In most of the country, that means you will take out a jumbo loan if the amount of the loan is greater than $417,000. In certain areas that are deemed high cost, the conforming loan limit goes above $417,000. You can look up your area’s loan limited here: https://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx.

Qualifying for a Jumbo Mortgage

Jumbo mortgages have the same overall qualifying methodology as a conforming loan. Lenders will look at your credit score, down payment size,  total monthly debt obligations relative to income (called your debt-to-income ratio), and money left over after closing.

• Credit score requirements are about the same for conforming and jumbo.
• Money left after closing – This is often called reserves or post-closing liquidity. Jumbo loans will be more stringent than conforming. Conforming loan reserve requirements range from 0 to 12 months, depending on factors such as credit score, down payment, and DTI. Exceptions on this are available if your debt-to-income ratio is low and your down payment is high.

How do jumbo rates compare

Before the financial crisis of 2008, jumbo loans typically had rates at least 0.25 percent higher than conforming loans because jumbo lenders were perceived as taking more risk making loans that couldn’t be sold to government backed Frannie Mae and Freddie Mac. This risk translated into higher consumer rates.

In the years following the financial crisis, federal regulations have impacted rare markets in such a way that has enabled banks to keep jumbo rates about the same as conforming rates. This dynamic can change over time, so your lender here at First Ohio Home Finance will compare options and choose the best one for you!