What is Jumbo Financing?
When the amount borrowed with a mortgage exceeds the conforming loan limit for the area in which the subject property is located a jumbo mortgage may be required. These limits are set by the Federal Housing Finance Agency (FHFA.) Counties with higher cost real estate generally have higher conforming loan limits, and the limits also increase for multi unit properties.
Interest rates for jumbo loans tend to be somewhat higher when compared to mortgages on lower loan amounts, as the increased funds borrowed represents a greater risk to the lender. Additional underwriting standards may be required as well to further mitigate the risk of lending a large sum.
Jumbo Mortgage Basics
- 15 year and 30 year fully amortizing fixed, and 7/1 ARM options
- One to Four Unit Homes, Approved Condos, Planned Unit Developments (PUD) (Two to Four Unit Properties for Primary Residence Only)
- Primary Residence, Second Home, or Investment Property
- Borrow up to 90% of the Home’s Value
- Loan amounts up to $2,000,000
What are the benefits?
Jumbo loans allow borrowers to finance the purchase or refinance of a high value property. Several amortization options mean homeowners can choose from the security of a fixed rate or the initial low monthly payment of an adjustable rate mortgage. The loan can be aggressively paid down over a shorter 15 year term or the repayment can be distributed over the traditional 30 year term for lower monthly costs.
Who is eligible for Jumbo Financing?
The following types of borrowers may be eligible for a jumbo mortgage:
- U.S. Citizens
- Permanent Resident Aliens
- Non-permanent Resident Aliens who are legally present with an acceptable visa type. Funds must be from within the U.S.
- Inter-Vivos Revocable Trusts
- First Time Home Buyers (Primary residence only)
- Salaried and Self-Employed
Borrowers will need to meet the employment, credit, income, asset, and property requirements associated with the jumbo mortgage they are applying for. Some of these eligibility requirements include:
- Minimum qualifying credit score of 700. Higher qualifying scores are required in some scenarios such as for non-owner occupied homes, cash out refinance on a second home, or loan to value exceeding 80%.
- Eligible property types: Single family, Two to Four Unit, PUDs, and FNMA Approved Condos. Manufactured housing, factory built homes, and Co-ops are not permitted.
In which scenarios is the Jumbo Mortgage a good option?
When purchasing high value real estate, it can be hard to find a good financing option. Even if it is possible to pay cash for the property buyers may prefer not to have the funds tied up in the home. Borrowing some portion of the purchase price frees up money for other uses such as daily living expenses, savings, retirement funds, other investments, or additional real estate purchases.
Homeowners with a great deal of equity in a valuable property may also find a jumbo mortgage is a great fit, as a cash out refinance option. Depending on several factors including the current equity position, up to $350,000 cash out is permitted.
A rate and term refinance may be desirable for any of the following reasons:
- Convert an adjustable rate to a fixed
- Lower the interest rate
- Lower the monthly payment
- Shorten the loan term to pay off the mortgage sooner
- Reduce the amount paid towards interest
The Purpose of Jumbo Loans
Though there are many more conforming loans originated each year, jumbo mortgages represent an important part of the home financing industry. At times jumbo loans have been difficult to come by, such as following the housing crisis in 2008. Few lenders were offering large loan amounts either for purchase or refinance transactions, and the programs that were available often came with unattractive terms.
The availability of appealing and innovative funding options for buying and refinancing high value homes means this segment of the housing market can continue to grow. In addition, high net worth households can choose to use more of their money for supporting or investing in other areas of the economy.
Buying a Home with a Jumbo Mortgage
This program is ideal for buying a home in the price range that exceeds conforming loan limits. It is important to note that it is not the purchase price or value of the property, but the loan amount that determines whether jumbo financing is required.
If the purchase price exceeds the conforming loan limit for the area in which the home is located, but after subtracting the down payment the loan amount falls below it, the transaction will likely qualify for conventional financing. Some home buyers may choose to make a larger down payment in order to be eligible for a conventional purchase loan.
Jumbo Loan Refinancing
A high value home can also be refinanced with a jumbo mortgage. For a rate and term refinance the home cannot have been listed for sale within the previous six months unless the listing was withdrawn or expired before the date of the loan application.
There is also a cash-out option, but in this case the property cannot have been listed for sale within the previous six months regardless of whether there is an active listing. If it was for sale within the previous 6 – 12 months a letter explaining why the owners decided to maintain ownership will be required. The borrower must have held title for at least six months prior to the date of the loan application, unless the home was inherited.
Other Programs to Consider
If a jumbo mortgage is not required one of these programs may be a good fit:
- Low rate conforming mortgage: FNMA Fully Amortizing Fixed
- To renovate a home including the financing of luxury projects such as installing a pool or outdoor kitchen: Fannie Mae HomeStyle® Renovation Mortgage
- Low down payment, 30 year fixed option: FHA 203(b)