What Is A Jumbo Loan?
By Gustan Cho NMLS ID 873293
A Jumbo loan is often referred as a non-conforming loan. Conforming mortgage loans conform to FANNIE MAE or FREDDIE MAC maximum mortgage lending guidelines of $417,000. Any mortgage loans higher than the conforming lending limits capped by FANNIE MAE or FREDDIE MAC is known as a Jumbo loan.
Not all mortgage lenders offer Jumbo loans. Mortgage lenders that do offer Jumbo loans often have tougher mortgage lending guidelines. Jumbo mortgage lenders require higher down payments, higher credit scores, and lower debt to income ratios than conventional mortgage lenders. Jumbo mortgage rates are normally 0.50% higher than traditional conforming conventional mortgage rates. Majority of Jumbo mortgage lenders require a minimum of 20% down payment, however, there are Jumbo mortgage lending programs where a Jumbo lender will lend with only a 10% down payment with no mortgage insurance required in lieu of a higher mortgage rate than a normal Jumbo mortgage loan.
How Can I Get The Best Jumbo Mortgage Rates?
As mentioned earlier, Jumbo mortgage rates are higher than conforming conventional mortgage rates. Why are Jumbo loans mortgage rates higher? The main reason why mortgage rates on Jumbo loans are more expensive and higher is because the federal government does not back Jumbo loans like conforming conventional mortgage loans. Conforming conventional loans are backed up by Fannie Mae and Freddie Mac. Government loans are backed by FHA, VA, and USDA. Jumbo loans are backed by private investors and are often riskier than other loan programs and that is why Jumbo mortgage lenders have higher mortgage rates and require tougher mortgage lending guidelines than other mortgage loan programs.
California Real Estate: High Cost Areas, Jumbo Conforming Loan Limits
California has one of the highest real estate prices in the nation and the average loan size in California is $400,000 whereas in other parts of the country, the average loan size is $265,000. Fannie Mae and Freddie Mac was taken over by the federal government in late 2008 during the real estate and mortgage collapse as the housing market throughout the country was tanking like never before in history. The federal government intervened and in 2009, the United States Congress created and passed the American Recovery and Reinvestment Act of 2009. This law boosted the normal conforming mortgage lending limit from the standard $417,000 to $625,000 in many parts of the country which were designated high cost area, especially areas throughout the state of California. Prior to passage of this new mortgage lending increase law, many homeowners in California could not purchase homes in many high cost areas of California such as San Francisco, Los Angeles, Irvine, Sacramento, and San Diego. Now home buyers in high cost areas could borrow conforming conventional loans up to $625,500 without needing to qualify for Jumbo loans.
Qualifying For A Jumbo Loan: Jumbo Mortgage Programs
Jumbo loan eligibility requirements vary from Jumbo mortgage lender to Jumbo mortgage lender but in general there are several factors that will qualify a mortgage loan borrower for a Jumbo mortgage. Jumbo mortgage loans are considered riskier mortgage loans to mortgage lenders. Jumbo mortgage rates are credit driven and loan to value driven. To qualify for a Jumbo mortgage loan with the best Jumbo mortgage rates, a Jumbo home buyer needs a credit score of 740 FICO plus, a down payment of 25%, and a debt to income ratio below 40% DTI. This does not mean that a Jumbo mortgage loan borrower with the above criteria will not qualify for a Jumbo loan, but their terms and rates will be worse.
In general, the larger of a down payment a home buyer puts down, the less risk a mortgage lender has. Jumbo mortgage loans normally require a 20% down payment, however, if the Jumbo home buyer puts that extra 5% down payment, the Jumbo mortgage rates will be lower since the Jumbo mortgage lender has less risk. Same with credit scores. To qualify for a Jumbo mortgage loan, the bare minimum credit score required is 660 FICO credit score. However, a 660 FICO credit score is considered a super low credit score when it comes to Jumbo mortgages. There are price adjustments for every 20 FICO points on Jumbo mortgage rates. A person who has a 720 FICO credit score will pay a higher Jumbo mortgage rate than a person with a credit score of 740 FICO or higher. Most Jumbo mortgage lenders will cap the maximum debt to income ratios at 40% DTI for Jumbo mortgage loan applicants.
10% Down Payment Jumbo Loan Program: 90% Loan To Value, No Mortgage Insurance Required
Gustan Cho Associates now offers Jumbo loan programs that only require Jumbo mortgage loan applicants to put down 10% down payment with no mortgage insurance required for Jumbo mortgage loan borrowers in Illinois, Florida, California, Washington, Indiana, and Wisconsin. To qualify, the Jumbo home buyer needs a 740 FICO credit score and no more than a 40% debt to income ratio.