A Jumbo Loan also know as a Jumbo Mortgage is a mortgage for amounts that exceed the conforming loan limits set by the FHFA (Federal Housing Finance Agency). This means that unlike conventional mortgages it is not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. These mortgages cannot be sold or transferred to investors. These mortgages are for luxury properties and homes in highly competitive real estate markets. They have special underwriting requirements and tax implications.
When does a conventional (conforming) mortgage become a jumbo mortgage
This amount is determined by each state and county. The Federal Housing Finance Agency (FHFA) sets the ceiling on how much Freddie Mac or Fannie Mae will ensure each conventional (conforming) mortgage loan. The maximum limit for one unit properties for most of the US is $424,100. A mortgage in excess of this limit is considered a Jumbo Loan. The conventional (conforming) maximum in states and counties that have extremely high home prices (ie New York, Los Angeles, San Francisco) is $636,150. Any mortgage over this amount is considered a Jumbo loan. You will find a complete list of county loan limits under the FHA handbook on the FHFA website.
Risks of a Jumbo Loan
Fannie Mae and Freddie Mac do not guarantee jumbo loans. When you apply for a jumbo mortgage /loan you stand on your own. The lender is not allowed to 'sell' the mortgage as a security to an investment company as the risk is much higher than the borrower will default.
Requirements to get Jumbo Loan/Mortgage
In order to apply for a Jumbo Mortgage the requirements are much more stringent than with a conforming loan. If you are looking for a home that is appraised at $500,000 or more chances are you don't have the liquid cash to put down or pay cash for. Requirements are:
- Must have enough income to support the monthly payment. Lenders are looking applicants who earn a minimum of $250,000+ annually before they will underwrite a jumbo mortgage.
- Must have enough reserve cash and liquid assets equal to six months of mortgage payments
- Proof of income for previous 30 days, and W2 Forms for previous 2 years
- Must show documentation of all other loans
- Show proof of ownership of all other real estate etc.
- Credit score, history and usage must be excellent
- DTI ratios must be low
- Some lenders require a down payment of 30% although some have lowered the down payment to 10% - 15%. The benefit of a higher down payment means better rates and lower payments.
Costs of a Jumbo Loan
- If you put less than 20% down, you will be required to purchase Private Mortgage Insurance which cost is based strictly on the total loan amount. PMI rates average between 0.5% - 1% of the total loan and must be paid monthly. This insurance must stay in place until there is more than 20% equity in the property.
- Interest rates for jumbo mortgages/loans can be comparable with the rates for a conventional mortgage, although because of how big they are lenders may charge an extra 0.25 - 1.5%.
- The IRS has placed a cap on tax deductions for the interest. The IRS states that the mortgage interest on the first $1,000,000 combined on the primary and secondary real estate properties owned, can be deducted on form 1040. Before Assuming what you interest tax deduction is, we recommend that you seek the counsel of an accountant as the mortgage type and term will also dictate what you can use for income tax purposes.