A jumbo mortgage can be defined as a loan that exceeds the limits set for conventional loans. Fannie Mae (FNMA) and Freddie Mac (FHLMC) set limits on conventional loans. These two quasi-government agencies purchase home mortgages held by banks and other lending institutions. The added liquidity allows the banks and other lending institutions to make more loans. Fannie Mae and Freddie Mac will not buy back loans that exceed the conventional loan limits they set. Banks and other lending institutions willing to take on the additional risk become the originators and often the holders of these high dollar amount mortgages.
Conventional Mortgage Limits
Currently the limit to qualify for a conventional mortgage is set at $417,000.00. There are several exceptions (where the cost of housing can be substantially higher) to this limit. Hawaii, Alaska, Guam, and the U.S. Virgin Islands have conventional loan limits that top out at $625,000.00.
Getting a Jumbo Mortgage
In order to get a jumbo mortgage, banks are now making sure of a potential buyer’s ability to manage such a sizable mortgage loan. In general, lenders will demand a minimum FICO score of at least 720, see that you have liquid assets that can cover the mortgage for at least 6 months and demand a minimum of 20% down on the property. Burned badly in the recent real estate meltdown, banks are hesitant to make the same mistake again.
Terms of a Jumbo Mortgage
You will pay a higher interest rate when you take out a jumbo mortgage. Generally, the rate is at least .25 more than a conventional mortgage, to compensate for the additional default risk. Over the life of a jumbo loan, that higher interest rate can mean you are spending tens of thousands of dollars more than if you had a conventional loan.
Avoiding a Jumbo Mortgage
If you are purchasing a property and the mortgage will be slightly above the conventional loan limit, it is possible for you to take out a conventional loan (up to or close to the 417,000.00 threshold) and then get a smaller second mortgage. Fees and interest savings can be quite significant if you can stay away from a jumbo loan.