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What is a Jumbo Loan?

By Arvin Sahakian · May 22, 2015 · Mortgage

What is a Jumbo Loan?

Image courtesy of Flickr, Ananta Bhadra Lamichhane

You need a jumbo loan if you are buying a home in a high cost State. We will discuss important things you must know before you shop for a jumbo loan.

Jumbo loans have become increasingly necessary across the country due to the fact that many States have been seeing a rapid rise in property values over the last several decades. States like California are otherwise known as high cost States, which means that the average cost to buy a home is much higher than in other surrounding States. Jumbo loans provide a means for people to buy homes in these particular states.

We will describe what a jumbo loan is, how much more they cost, and what is required to qualify for such a loan.

What is a Conforming Loan?

To fully understand what a jumbo loan is, we must first take a look at "Conforming Loans."

Fannie Mae and Freddie Mac are government sponsored enterprises that purchase loans from lenders who issue loans to borrowers qualified under Fannie Mae and Freddie Mac standards. These enterprises set limits on loan amounts they are willing to purchase. Loans issued by lenders under these limits are known as "Conforming Loans," because they conform to set standards.

In the most States, the limit on conforming loans are $417,000 for a one unit residence (such as a single family home or a condominium). However, there are States known as high cost areas, to which the conforming loan limits are higher than $417,000.

For Example

  • Alaska has a limit up to $625,500
  • The U.S. Virgin Islands have a limit up to $625,500
  • Georgia has a limit up to $417,000
  • California has varying limits depending on the County within the state:
    • Los Angeles County has a limit up to $625,500
    • Monterey County has a limit up to $502,550

Fannie Mae and Freddie Mac have compiled a list of conforming loan amounts across all States. These loan limits increase for two, three and four unit properties.

What is a Jumbo Loan?

A jumbo loan is simply any mortgage loan amount that is above the Fannie Mae and Freddie Mac conforming loans limits we have described above.

For Example

  • In Alaska, a loan amount above $625,500 is a Jumbo Loan
  • In the U.S. Virgin Islands a loan amount above $625,500 is a Jumbo Loan
  • In Georgia, a loan amount above $417,000 is a Jumbo Loan
  • California has varying limits depending on the County within the state:
    • In Los Angeles County, a loan amount above $625,500 is a Jumbo Loan
    • In Monterey County, a loan amount above $502,550 is a Jumbo Loan

Do Jumbo Loans Cost More?

The short answer is yes.

The majority of lenders will have higher interest rates for jumbo loans. The reasoning for it is simple. The higher loan amount means there is a higher risk to the lender, therefore there must be a higher cost to attain the loan (which translates into a higher interest rate).

In most cases, you will see that interest rates for jumbo loans are 0.25% - 0.50% higher than a typical non-jumbo loan.

Qualifying for a Jumbo Loan

Much of the required qualifications of borrowers for jumbo loans are similar to non-jumbo loans, such as:

  • Maintaining a credit score of 680 or higher
  • Having a debt-to-income ratio within or below the range of 36% - 43%

You will also need to provide various documents to verify your employment, income, assets and other savings.

The following is a brief list of the most commonly required documents. For a complete list, refer to our previously published article titled " What Documents are Required for a Home Loan?"

Income Documents

  • Two recent years of Federal Tax Returns
  • Two recent years of W-2's
  • Two recent years of 1099's (if applicable)
  • Two most recent paycheck stubs
  • Award letters for any additional income (such as alimony, retirement or disability)

Credit Documents

  • Once you have completed a loan application, your lender will generate a credit report for you from all three credit bureaus (Transunion, Experian and Equifax)

Asset / Reserve Documents

  • Bank statements from most recent 3 - 6 month period
  • Statements from any investment brokerages and retirement plans

How to Find a Jumbo Loan Lender

Nearly all of the national and local lenders will have mortgage programs available for jumbo loans. Particularly those lenders who operate in high cost States. We recommend shopping with up to three lenders for a comparison.

Considering that most lenders will be relatively competitive with rates and costs, we believe you should also consider the following attributes when choosing a lender:

Attribute Description
Accuracy Lenders who deliver what they promise and ask the right questions
Efficiency Lenders that have a simple, clear and organized application/ approval process
Timeliness Lenders who respond to you promptly and stay in touch through the process
Service Lenders who take time to teach you and answer your questions thoroughly

If you find that any one or all of these points are lacking, you should seriously consider shopping for a different lender. The mortgage process is very time sensitive and can be quite complicated, therefore we believe that the four qualities we point out above are essential to an easier and faster mortgage closing process.

For a more in depth review of what to look for when searching for a lender, refer to our previous article titled " How to Choose a Mortgage Lender?"

Things to Remember

Jumbo loans go beyond the limitations of the conforming loan amounts set by Fannie Mae and Freddie Mac. For example, any loan above $625,500 in the County of Los Angeles California is considered a jumbo loan.

Qualifying for a jumbo loan is not unlike qualifying for a non-jumbo loan. You will need to meet credit, income and asset requirements and submit appropriate documentation to back up the information on your mortgage loan application.

Choosing which lender to use goes beyond comparing rates and costs. There are other variables you should consider in determining which lender to choose, such as accuracy, efficiency, timeliness, and service.

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