A jumbo loan is a type of non-compliant loan that allows the borrower to apply for a mortgage for an amount that exceeds the limits of compliant loans. This type of loan is also known as a giant loan, as it goes beyond the limits set by the Federal Housing Finance Agency (FHFA) for conventional loans purchased by Fannie Mae or Freddie Mac. In general, a jumbo loan will have a higher interest rate than a conventional loan. However, if you can demonstrate that you have a high income and the ability to repay your loan, some lenders may offer you an interest rate comparable to that of a conventional loan.
Both conventional and jumbo loans require good to excellent credit ratings, but jumbo loans have additional qualifying factors, such as higher revenues, a lower debt-to-income (DTI) ratio, and more reserves. In addition, since jumbo mortgages do not meet certain standards set by Fannie Mae or Freddie Mac, lenders may impose stricter credit qualification requirements or a higher DTI ratio on borrowers to approve these types of loans. To qualify for a jumbo loan, many mortgage lenders look for a credit rating of 700 or more, although some go as low as 660 or 680. Like jumbo loans, conventional loans require a down payment, a minimum credit rating and a certain level of income, as well as a low DTI ratio. In the past, interest rates on jumbo loans were much higher than those on traditional and conventional mortgages.
However, with the introduction of Consumer Financial Protection Office (CFPB) guidelines for eligible mortgages (for example, not allowing excessive fees, loan terms, or negative amortizations), many jumbo loans still meet these standards. If you're buying a more expensive home that exceeds the limits of conventional loans, you'll have to choose a jumbo loan unless you can make a down payment large enough that the value of the loan is below that limit. Applying for a jumbo loan is similar to applying for a compliant mortgage, but the requirements are often stricter. When it comes to borrowing money to buy a home, it can be difficult to understand the differences between jumbo mortgages and compliant mortgages. However, understanding these differences can help you make an informed decision when it comes to choosing the right type of loan for your needs.
